Garnet Capital Advisors Blog

Excerpt:

Will the Federal Reserve further slash rates in 2019 over dips in Treasury yields? Read on to learn more.

Ten-year Treasury yield decreased to 2.060 percent, while two-year yield dipped to 1.785 percent.

With Treasury yields recently dropping — even more than economists may have expected — some believe that the Federal Reserve could cut interest rates at least one more time before year-end.

Government bond yields recently plummeted following the announcement from the Labor Department that fewer jobs were added in May than expected. The approximate 75,000 additional jobs added last month continued with the string of gains, but hiring was slower than anticipated.

The yield on two-year Treasury notes typically moves in tandem with investors’ predictions about what the Federal Reserve will do with interest rates and policy, and it dropped to 1.785 percent from a previous 1.880 percent. That makes it nearly half a percentage point below the lower end of the 2.25 to 2.5 percent range of the central bank's benchmark overnight rate.

JP Morgan Chase strategists say their target for year-end is now 1.75 percent, as the investment bank — among others — now anticipate at least two Fed rate cuts for 2019.

The yield on the benchmark 10-year Treasury note also dipped from 2.105 percent to 2.060 percent. At the beginning of May, it was at 2.55 percent.

The 10-year Treasury yield has traditionally been viewed as a measure of economic health because of its impact on setting borrowing costs for various types of loans. Generally speaking, it decreases when investor confidence in the economy weakens. Yield decreases to this degree signal that investors anticipate that the Fed will slash interest rates more than once over the near future.

Will the decreases in Treasury yields mean more than one interest rate cuts from the Fed this year?

At the start of 2019, many strategists anticipated that the central bank would hike rates, and that the 10-year yield would be over the three percent mark. However, investors continue to remain concerned over the trade war between the U.S. and China.

Despite concerns, some don't believe that the 10-year will drop too far below two percent as a result of increased uncertainty. But according to the bond market, the growth environment is slower than what some forecasts may be signaling.

While Treasury yields and the central bank's decision on interest rates may be uncertain, banks, credit unions, and other financial institutions are in a position to strengthen and solidify their loan portfolios to withstand fluctuations in the economic environment.

The recent rate rally can allow financial institutions to sell previously underwater assets and replace them with shorter-duration assets that have a much stronger profile. Lenders and banks can partner with loan sale advisors like Garnet Capital to sell off assets and run off deposits that are doing little for their bottom line.

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