Global Weekly: A flatter yield curve

News item -

US treasuries continued to move in their trading range, set since February, and there are currently no signs that the 10-year US Treasuries might break through the 3.0% yield level. Also in Europe, we saw core government bonds from Germany, France and the Netherlands moving in a trading range, and outperformance for European peripheral bonds from countries such as Italy, Spain and Portugal.

Most poignant this week was a further flattening of the US Treasury bond yield curve. A yield curve is a graph that shows the interest rates of a series of bonds of different maturities. In a flat yield curve there is only little difference between short-term and long-term rates for a series of bonds, in this case, the US Treasury. The US financial market is a leading market and as such, it gives signals to other markets. Investors are therefore keen to understand what is going on at the other side of the Atlantic.

Typically, the difference between 10- and 2-year US Treasuries (currently 46 basis points, or bps) is the central topic. A flattening of the yield curve usually signals the conditions of future economic activities. If it becomes an inverted yield curve (with higher short-term and lower long-term rates), it could predict low future output growth. This week’s attention was focused on the difference between 30- and 5-years US Treasuries, indicating tighter levels. It could even go through 30 bps. Between 2005 and 2009, the period up to the global financial crisis, this difference was close to 5 bps. Also, between the 10- and 2-year US Treasuries the difference then was 5 bps.

Some Fed policymakers are expressing concerns that their committee members should not push their interest hiking expectations aggressively further. Because in their view, inflation may be low and growth relatively ok, but not high enough to test the waters. We remain comfortable with our current positioning, as our US economist expects a moderate Fed rate hiking path and a stable outlook for inflation indicators. It could be that markets will adopt that direction as well.

Earnings season: positive kick-off

Stock markets rose this week, as trade war worries subsided and the start of the earnings season was generally positive. The best performing sectors were energy and materials. Energy stocks were helped by a further rise in the oil price. The strength of the materials sector was a result of rising industrial metal prices, primarily aluminium. The aluminium price spiked by around 10% this week, following US sanctions against Rusal, Russia’s largest aluminium producer. Higher prices are good for companies like ArcelorMittal, Rio Tinto and Glencore.

In the US, Netflix’ quarterly results surprised investors positively as the number of subscribers worldwide grew to 125 million. However, IBM’s results disappointed as cloud revenue growth slowed down and the shares dropped 7%. ASML – Europe’s largest semiconductor company – reported solid results, but the shares declined the days thereafter as investors took profits. In consumer staples, Nestlé and Unilever reported sales growth in line with expectations, while Heineken slightly disappointed as cold weather throughout Europe hurt beer demand in the first quarter. Next week, the earnings season will peak in the US with some 200 of the S&P 500 companies reporting, including tech giants like Microsoft, Alphabet/Google and Facebook. In Europe, a quarter of the companies in the STOXX Europe 600 Index will report, including Royal Dutch, SAP, UBS and Volkswagen.