Last week’s big decline in US Treasury yields is not necessarily a ‘vote of no confidence’ in risk assets. Lyft’s impressive debut on Friday shows investors are still willing to back companies with new business models that challenge incumbents. The decline in yields may be less about weak economic growth, reflecting instead the welcome pragmatism of a Fed that will support the growth of new technology companies.
Low inflation numbers help this narrative, and the core consumption deflator was very benign in January, slowing by even more than the CPI. February’s deflator will show another big decline. The whole yield curve has shifted down, ensuring that the economy will continue to expand at a pace close to potential in 2019 and beyond.
Indeed, the 10-2 year Treasury yield spread has not changed materially this year. There has been considerable focus on the negative spread between 10-year yields and 3-month Treasury bill rates. However, what really matters is the broad-based decline in all yields. The Fed has engineered a big stimulus without cutting rates.
