These Are the Forces Driving the Bond Rally

The U.S. has had an extended and very impressive rally in the prices of U.S. Treasury securities. The 10-year U.S. Treasury has seen its yield move from a recent high over 3.20 percent in early October 2018, down to below 2.20 percent at the end of May 2019.
One of the most important questions is whether the Treasury rally is signaling that a U.S. recession is imminent. While we see U.S. real GDP decelerating into the second half of 2019, we do not yet see the United States moving into an actual recession in the near future. If that read is correct, then what is driving the U.S. bond market rally?

Let’s examine a multiplicity of forces impacting the market.

Unusual Shape of the Yield Curve

The U.S. Treasury yield curve has an unusual shape. At the end of May 2019, the curve is inverted, short yields above long yields from the overnight federal funds rate (at 2.4 percent) and 3-month T-bills through to the 5-year Treasury Note (just below 2.00 percent). The 5-year yield is the low point, however, and as maturities increase to 10 years and longer, yields move back to a very modestly positive slope.

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