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US yield curve flattens

August 2018

As the US yield curve has continued to flatten, some officials at the Federal Reserve (Fed) are monitoring its trajectory for evidence of economic downturn. In the past, narrowing spreads between yields for shorter-dated and longer-dated US Treasury bonds have tended to herald worries about economic prospects.

  • The benchmark Italian government bond yield surged during August
  • The Fed intends to continue to tighten interest rates gradually
  • Investors tended to favour fixed income funds over equity funds

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As the US yield curve has continued to flatten, some officials at the Federal Reserve (Fed) are monitoring its trajectory for evidence of economic downturn. In the past, narrowing spreads between yields for shorter-dated and longer-dated US Treasury bonds have tended to herald worries about economic prospects, and recent minutes from the Federal Open Market Committee (FOMC) have indicated that some policymakers are paying close attention to the slope of the yield curve when assessing the outlook. 

“Some policymakers are paying close attention to the slope of the yield curve”

The yield on the benchmark US Treasury bond breached 3% at the start of August, boosted in part by encouraging labour market data that helped to underpin expectations of further increases in interest rates. The Fed intends to implement further “gradual” interest-rate increases over the next couple of years. Over August as a whole, the benchmark US Treasury Bond yield dropped from 2.97% to 2.86%.

The yield on Italy’s benchmark government bond rose sharply during the month amid ongoing concerns over the country’s public finances. Italy has a debt-to-GDP ratio of around 130%, which puts it at the highest level in the EU apart from Greece, and the country’s problems have placed its credit rating under scrutiny. During August, credit ratings agency Fitch maintained Italy’s credit rating at “BBB”, but downgraded its outlook to “negative”, citing the vulnerability of Italy’s “very high” level of public debt to shocks and its unstable political backdrop. Fitch also warned that the possibility of early elections could create additional uncertainty around fiscal forecasting. 

Meanwhile, having placed Italy’s “Baa2” rating under review in May, citing fiscal weakness and question-marks over structural reform, Moody’s announced an extension to the review period in order gain more clarity on the direction of policy and reform. Moody’s is waiting for the publication of the updated “Economic and Financial Document” (DEF) – which outlines the government’s economic forecasts and policy plans – and expects to conclude its review by the end of October. The benchmark Italian government bond yield surged from 2.68% to 3.18% during August. 

Investors continued to favour fixed income funds during July, according to the most recent survey from the Investment Association (IA). Although demand for funds in the UK Gilts and £ Corporate Bond sectors picked up sharply during the month, funds invested in global bonds and global emerging markets bonds remained out of favour. 


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