The government bond market can tell us a whole lot about what investors think the Federal Reserve is going to do with interest rates. That, and where they think labor markets are going to end up and where inflation will settle. In other words, where the economy is headed.
Let’s start with yields on short-term government debt: Treasury bills that mature in a year. Or even less.
“Short-term interest rates are really a function of the Federal Reserve,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
He said those yields tend to move in the same direction as the Fed’s interest rate decisions. And lately short-term yields have been falling.
“Short-term interest rates are telling us that while the markets might debate over whether the Federal Reserve is cutting in December, or January, that they’re still in cutting mode,” LeBas said.
Then, there’s medium–term government debt — Treasuries that mature in three and five years. Winnie Cisar, global head of strategy at CreditSights, said those yields can tell us more about what’s next with the overall economy.
“When you are looking at that three–five-year segment, you’re trying to assess what is a reasonable forecast for GDP growth, for inflation, for consumer spending,” said Cisar.
Cisar said yields on that medium-term debt have been falling, too. Which means markets think the Fed will continue to lower interest rates.
“I think that reflects, to me, that the market is expecting inflation is going to continue to come down, and the labor market might continue to feel a bit soft,” Cisar said.
Finally, there’s long-term government bonds that mature in 10 years or even 30 years.
“Yields are lower, but they haven’t fallen as much as yields on the two- and five-year parts of the curve,” Randy Vogel, head of fixed income at Wilmington Trust.
He said investors expect the Treasury Department to issue a lot of long-term debt in the future.
“Which would mean investors need more of an incentive, in the form of higher yields, to purchase that Treasury bond,” Vogel said.
But Vogel said the fact that 10- and 30-year bond yields are holding relatively steady is also a sign that investors don’t feel the need to dump a bunch of extra money into long-term government debt.
“If the markets were really concerned about the economy, and the economy heading into a recession, and growth turning negative, then I’d expect to see the long-term part of the market outperform,” Vogel said.
Instead, Vogel said yields on long-term bonds have been telling us that markets expect decent economic growth.