US 10-year yields is sitting at 2.43% today, pretty much where it finished last year at 2.44%
If you were to look at the chart for US 10-year yields this year, you wouldn't be able to tell that we actually saw three rate hikes in the US in 2017. But we actually did.
And despite that, it has failed to lift longer-term yields in the US higher. US 2-year yields on the other hand benefited from that, as it moved up 71 bps on the year from 1.19% to 1.90%.
That has seen the 2-10 spread narrow from more than 120 bps to 52 bps as we end the year. Some economists argue that a narrowing 2-10 spread is a signal that a recession is coming, but outgoing Fed Chair Yellen said that "correlation should not be confused with causation" - when questioned on the matter. Whether or not who is right remains to be seen.
So what exactly does it take to lift longer-term yields in the US?
The last time the Fed was tightening rates back in 2004, longer-term yields failed to gain a boost as well. It wasn't only until the Fed funds rate caught up with US 10-year yields did we see it start moving higher towards 5% back in 2006.
If history is any guide, this year's lackadaisical movement in US 10-year yields feels like it's waiting for a catch up by the Fed funds rate before moving higher. We're about 100 bps away right now between the Fed funds rate and US 10-year yields, so maybe even 4 rate hikes next year may not be enough to push yields higher.
Well, let's see what the bond market thinks in 2018. To our readers, any thoughts on the matter?
