CAPITAL MARKETS UPDATE

[Pages:27]CAPITAL MARKETS BUREAU CAPITAL MARKETS UPDATE

NOVEMBER 2018

U.S. TREASURIES AND THE YIELD CURVE

Jennifer Johnson Manager, NAIC Capital Markets Bureau

Rising Rates

? In Sept. 2018 the Fed raised the benchmark fed funds rate a quarter point to a range of 2.00%-2.25% - the first time above 2% since 2008.

? The increase in Sept. was the third time this year that the rate was raised and the eighth time since the Fed began increasing rates in late 2015.

? The Fed is expected to increase the rate again in December as well as into 2019.

10-Year U.S. Treasury Bond Yield Year-To-Date (YTD) Nov. 6, 2018

? The yield on the 10-year U.S. Treasury reached a high in early October 2018 ? its highest level since July 2011.

? The yield has generally been rising YTD due to robust U.S. economic data and easing of trade tensions.

30 yr. U.S. Treasury vs. 12 mo. U.S. T-Bill (spread)

YTD Nov. 6, 2018

? A flattening yield curve is a sign of positive long-term growth expectations. ? The spread differential between the 30-year U.S. Treasury and 12 mo. U.S. T-bill

has been decreasing since the beginning of the year: it was about 74 basis points (bps) as of Nov. 6, 2018, compared to about 105 bps in early January.

10-Year U.K. Government Bond Yield YTD Nov. 6, 2018

? The yield on the UK 10-year government bond has ranged between 1.19% and 1.7% (October 10) so far this year.

? The high in October was due in part to better than expected economic growth along with optimism that a Brexit deal would be reached prior to the expected March 2019 departure.

10-Year German Government Bond Yield YTD Nov. 6, 2018

? The yield on the 10-year German bund has been volatile; it reached a high of 0.765% in February from a low of 0.260% in May; it was 0.429% on Nov. 6, 2018.

? The dip in the German bund in late October was partly a reaction to Angela Merkel announcing that she will not return for another term as German chancellor.

10-Year U.S. vs. 10- Year German Government Bond Yield (spread) YTD Nov. 6, 2018

? The differential between the U.S. 10-year Treasury and German 10-year government bund has been widening, reflecting better long-term growth prospects in the U.S. than in Europe.

? As of Nov. 6, 2018, the differential was 277 bps, having increased from about 200 bps in January.

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