Optimism that the economy is in the early stages of recovery following the COVID-19 outbreak and related shutdown continues to fuel gains in the equity markets, while U.S. Treasury yields have gradually increased from the March 9 lows. The action for the equity markets has been more robust as the S&P-500 has recovered about 800 points of the 1149 point drop from the mid-February record high of 3386 to the March 23 low of 2237.

U.S. Treasury yields are at historic lows with the 2-year yield down 125 basis points from Feb. 6 to 0.22%. The 10-year yield is down nearly 100 basis points to 0.67%. Many factors are in play as we go forward. The current level of economic uncertainty and market disruption will likely keep the 2-year yield under 0.60% for the next few months, depending on how sharp the decline in the economy is and the size of the monetary stimulus provided by the Federal Reserve.

Several concerns from 2019 will remain in play for 2020.  

U.S. Treasury yields have continued to move lower as we reach the midpoint of 2019. Ongoing trade frictions, global economic weakness and elevated geopolitical risks are exerting downward pressure on U.S. Treasury and other sovereign debt yields. Markets are contending with the prospect of an economy that’s likely losing momentum as inflation slows while employment remains solid.

U.S. Treasury long-term yields have moved lower in recent days following the March 20 update on monetary policy by the Federal Open Market Committee. In addition, global growth metrics are signaling weakness and markets are trading in risk-off mode. In its policy statement, the FOMC indicated its intention to keep interest rates unchanged for the rest of 2019 and to end balance sheet reductions by September. The potential for a rate hike in 2020 remains.

U.S. Treasury long-term yields have taken a downturn over the past few months as the equity markets remain volatile, while the Federal government partial shutdown continues. It appears there is limited urgency on the part of politicians to come to an agreement on a budget deal.

To engineer an economic “soft landing,” Federal Reserve monetary policy must be tightened at just the right time and just enough to avoid an overheating economy without triggering a recession. The Fed has accomplished this feat only one time since it was established in December 1913, nearly 105 years ago.

Major economic and financial market themes currently in play include a nice rebound in U.S. domestic growth, a moderate acceleration in inflation, and continued gradual improvements in the labor sector. Monetary policy appears to be on track for two more rate hikes this year while the potential for a trade war between the U.S. and its major trading partners is increasingly worrisome.

The Bureau of Economic Analysis is getting ready to release its final revision to the Q4 2017 Gross Domestic Product, which is expected to come in around 2.5 percent. This compares to real growth rates of 3.1 and 3.2 percent for the second and third quarters, respectively, and indicates economic activity is continuing to expand, albeit at a slower pace.

We’ve yet to get the official report on real GDP for the final quarter of 2017, but we’re expecting the Bureau of Economic Analysis to report the economy expanded by 2.5 percent. The economy is near full employment with the official unemployment rate at 4.1 percent, while non-farm payrolls expanded at an average of about 175,000 a month.