Hello. I’m James Willhite, with Friday’s update as stocks around the world are making small moves while investors are focused on escalating U.S.-China tensions and efforts toward a broad virus recovery package in Europe.
Futures are up. The number of new coronavirus cases in the U.S. hit a new daily record of more than 77,000 on Thursday. Data on housing starts for June are expected to register a jump this morning, and we’ll also get a read on the mood among consumers. Read our full market wrap here.
Meanwhile, our Sam Goldfarb explains how tumbling Treasury yields are raising the fortunes of riskier assets.
Markets in a Minute
Tumbling Real Bond Yields Boost Other Assets
By Sam Goldfarb, markets reporter
U.S. Treasury yields have fallen close to record lows when adjusted for expected inflation, providing an extra boost to riskier assets in response to both better economic data and the promise of continued monetary stimulus.
In recent months, the yield on 10-year Treasury inflation-protected security has dropped sharply even as the nominal 10-year yield has stayed roughly unchanged—a combination that suggests investors are both dialing up their inflation expectations and not worrying about any increase in short-term interest rates.
Looking at the issue from one angle: a measure of investors’ annual inflation expectations based on the difference between the nominal and inflation-protected Treasury yields—known as the break-even inflation rate—has jumped to 1.42% from 1.05% on May 1.
At the same time, the nominal 10-year yield has ticked down to 0.61% from 0.64%. That means the inflation-adjusted 10-year Treasury yield, a proxy for the so-called real yield, has slid from around minus 0.4% to minus 0.8%—a level not reached since late 2012, when the Fed was still responding to the 2008-09 financial crisis.
Taken together, the increase in inflation expectations and decline in real yields both echo and help explain the strong performance of stocks in recent months. A rising break-even rate is typically associated with an improved economic outlook. Falling real yields, meanwhile, can boost the economy by weakening the U.S. dollar and spurring investors to buy riskier assets because inflation is causing them to lose money on their bonds.
Similar to stocks, the break-even rate was initially lifted in the spring by a run of better-than-expected economic data, as states started to ease back restrictions aimed at controlling the coronavirus pandemic. The expected inflation rate got an added push after June 10, when Fed Chairman Jerome Powell delivered a grim assessment of the economy and said officials weren’t “even thinking about thinking about raising rates.”
Despite Mr. Powell’s gloomy tone, investors were eventually comforted by his assurances that the central bank would maintain, and possibly even expand, its stimulus programs, investors and analysts said.
The resulting decline in real Treasury yields is likely intentional, some of those people said. At a time when the Fed has already pinned short-term interest rates to zero, one of the most important ways it can provide further stimulus is by boosting inflation expectations and thereby driving down the expected real yields on Treasurys.
For a longer version of this article online, follow this link.
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- The yield on 10-year German bunds edged down Friday morning to minus 0.504%, while yields on Italian bonds of the same duration ticked up to 1.188%. Analysts said European government bond yields could rise if there are stumbling blocks regarding agreement on the EU recovery fund, as the European Council starts its two-day summit.
- The average rate on a 30-year fixed mortgage fell to 2.98%, mortgage-finance giant Freddie Mac said Thursday, its lowest level in almost 50 years of record keeping. It is the third consecutive week and the seventh time this year that rates on America’s most popular home loan have hit a fresh low.
- On this day in 1861, the first paper money payable on demand, whose color gave our bills the nickname “greenbacks,” was issued by the U.S. government.
U.S. housing starts for June are released at 8:30 a.m. ET and are expected to show an 18.1% increase over the previous month.
The University of Michigan’s index of consumer sentiment for July comes out at 10 a.m. and is expected to post 77.8.
U.S. Treasury Secretary Steven Mnuchin testifies before the House Small Business Committee at 10:30 a.m.