Chart of the Week

Sources: 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.

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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.

• 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.

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.

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