Yes A checkmark with a circle around it close Wells Fargo Advisors on Facebook Facebook symbol, links to WFA Facebook page Wells Fargo Advisors on Linkedin Linkedin symbol, links to WFA Linkedin page

Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

May 27, 2020

Peter Wilson, Global Fixed Income Strategist

Treasury Borrowing Begins—and the Yield Curve Reacts

Treasury Borrowing Begins—and the Yield Curve ReactsSources: Bloomberg, Wells Fargo Investment Institute; May 13, 2020. Yields represent past performance and fluctuate with market conditions. Current yields may be higher or lower than those quoted above. Past performance is no guarantee of future results. This chart was excerpted from the Investment Strategy report dated May 18, 2020.

Download the report (PDF)

Treasury yield curve starts to anticipate increased supply

On May 4, the U.S. Treasury Department announced that it would borrow almost $3 trillion in the second quarter of 2020 so it can fund the government’s massive fiscal response to the coronavirus crisis. The following week, we saw how this may be reflected in the market, with Treasury issuance totaling $96 billion in 3-year, 10-year, and 30-year securities—$8 billion higher than the last round of auctions at these maturities.

The chart reflects how yields responded to this supply increase. The 2-year Treasury yield continued to decline, but the 10-year yield rose, taking the spread between 2- and 10-year Treasury yields above 0.5%. Concern that the market will struggle to absorb increasingly large Treasury supply appears behind this yield increase, along with worries that increasing debt could fuel higher inflation in coming years.

What it May Mean for Investors

  • We expect longer-term Treasury yields to rise, but only modestly. The Federal Reserve (Fed) is purchasing just over $9 billion per business day, but this can be increased as needed to help prevent short-term yield hikes. We see the 10-year Treasury yield in a range of 0.75-1.25% at year-end 2020.
  • In the near and intermediate term, we expect the pandemic’s impact to be disinflationary, if not deflationary. The Fed’s favored medium-term indicator of inflation expectations stands at 1.38%, close to all-time lows.

Risks Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.