The recent, rapid decline in yields offered by ten-year US government bonds deserves further investigation as it could be a useful indicator on the economic outlook, not only in the US. In fact, the yield has fallen from almost 4.8% to the current 4.25% in just a few weeks, almost entirely through the reduction of the duration premium component. This has adapted to the indications of the FED, which has reduced its GDP growth estimates for the current year from 2.1% to 1.7%.
The potential savings in debt servicing resulting from this reduction in yields is certainly in favor of the Trump administration, which is more interested in the positive performance of the bond sector rather than stock market dynamics, given the disquieting situation of public finances. It should be remembered that the new Secretary of the Treasury, Mr. Bessent, will have the onerous task of refinancing approximately 30% of the outstanding government debt this year, due to the policy of by his predecessor to shift issues from bonds to short-term Treasury bills, in an attempt to reduce the cost of interest. However, looking at the US yield curve today, an anomalous convexity can be observed, with a minimum yield on two-year maturities below 4%. If we relegate ourselves to evaluating the curve alone, we can see that it is flat, around 4.25%, and therefore according to consolidated praxis it would not imply an upcoming economic slowdown. But experience imparts that, when the curve is convex, a prospective economic slowdown almost always occurs, which would justify the correction of almost 10%, compared to the highs of late 2024, logged in March by the primary US stock indices.
But even if this hypothesis seems valid for the US state of affairs, in a globalized world, we cannot ignore what is happening with other major world economies. An analysis of the latter shows an important dichotomy in the expected economic dynamics compared to the US, in the sense that long-term bond yields are generally rising, precisely because duration premiums have corrected upwards, discounting a contrary situation. Emblematic in this regard is the trend of Chinese long-term rates, which initially went from 2.20% in autumn 2024, to 1.6% in January 2025, then up to the current 1.95%, which discounts the government’s serious attempts to support domestic demand. But even in Japan, struggling with a significant resurgence of inflation and in Europe, where consolidated yields are rapidly rising due to the huge allocations needed for the area’s rearmament, the economic outlook is gradually improving. So, the new US administration will have to come to terms with the fact that dollar yields will soon return to 5%, if not higher, given that the global economy will grow supported by expansionary monetary policies that even the FED will soon no longer be able to avoid.
Therefore, if the economic slowdown turns out to be only temporary, the technical hypothesis that the lateral dynamics of the indices coincides with an accumulation phase would be confirmed, making the current support levels, such as 5600 points for the S&P500, suitable for buying in the sectors favored by current demand. The moderate stock market correction coincided with a similar and rapid weakening of the dollar, which did not hesitate to overcome support in the 1.05/1.06 level against the euro, only to settle close to the next level at 1.09. The trend is lateral, conditioned by the recessionary hypothesis on the one hand and by the constant inflow of foreign capital towards the US on the other.
Nicola Bravetti Data Source: Bloomberg
“This report cannot – nor can – be consider a solicitation to invest in financial instruments.”