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PODCAST: U.S. Treasury Market Update, Including Commentary on the Treasury Yield Curve Inversion


  • Transcript


    Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome today’s host, Jim Barnes, director of fixed income at BMT Wealth Management.

    [JIM BARNES] Hi, my name is Jim Barnes. I am the director of Fixed Income here at Bryn Mawr Trust. And I wanted to talk to you a little bit today in regards to some of the developments that we’re seeing within the US treasury market. In fact, earlier on today, we saw the US treasury curve invert between– and when looking at the difference between the three-month US treasury bill and the 10-year US treasury note.

    And when I’m referred to inversion, I’m simply saying that the yield on the shorter-term security was a little bit higher compared to the 10-year treasury note. Very interesting, because the market has been talking about this phenomenon for quite some time. And now, finally, it’s actually happened.

    I would point that probably two different events that led to today’s market’s reaction– the first had to do with the Federal Open Market Committee that concluded on Wednesday March 20, and then some economic data that came in, some partly from overseas over there in Germany, and then some economic data here domestically within the US.

    So just starting off with the Federal Reserve. So they held their two-day meeting. And Chairman Jerome Powell– he presented his case to the media to the markets out there. And he came across very dovish, much more dovish than what the marketplace had been anticipating.

    I think we all saw some slowdown in some of the economic growth data. But they have revised down their expectations for growth in 2019 down to 2.1%. So that’s only a little bit above average and certainly a lot lower than where we were in 2018. And 2018, the US economy actually grew slightly north of 3%.

    And it was interesting, because when you listen to him talk, here, domestically, things seemed to be pretty good. I mean, the labor market is still very strong and healthy. Income levels on a consumer side are continuing to grow. Confidence levels from the consumer in the business sector are still on the high side.

    But it just seemed as if they’re looking at some of the economic data that’s come in. And we’re decelerating. And it’s no surprise. We knew that economic growth this year was going to decelerate.

    But outside of, I would say, somewhat optimistic view on the US, he was somewhat pessimistic on economies outside the US. And he noted China and Europe as two areas where just some more than expected deceleration within those economies.

    At the end of the day, the world we are got somewhat integrated from an economic standpoint. So there is some concerns that, quite possibly, some slowdown overseas could filter into some of our economy here and lead to a faster slowdown of economic growth than what’s initially expected.

    I mean, now, that’s an interesting point, because the market treasury yields have dropped quite a bit after the end of the FOMC meeting from Wednesday that the market reacted by driving US treasury yield’s lower prices higher in anticipation of maybe some slowing down of growth going forward.

    But this morning, we actually got some data that somewhat support and provided some evidence out there to the marketplace that maybe we are slowing. And specifically in that there was some manufacturing data out there in Germany that actually was pointing towards some contraction.

    And then here in the US, a manufacturing data came out. And although we’re still in expansionary territory for the economy, It missed that the market’s expectations– it came in a little bit slower than had been anticipated.

    And we saw another big drop down in yields again today where if I look anywhere from, say, the two-year treasury or the 10-year treasury, everything seemed to be down about 10 to 15 basis points collectively on the week. And it’s interesting, because it’s just manufacturing data.

    And I think about here in the US, manufacturing only makes up about 15% of the US economy. But we have to keep in mind that the manufacturing sector is very sensitive to the overall business cycle. And it kind of makes sense. I mean, if things are good out there, and you’re feeling good. You’re feeling optimistic. Your income levels are high.

    You have a refrigerator at home. And it seems as if I could use some replacement. Maybe you might go out there and splurge and buy a new refrigerator. So that’s kind of the point here is that manufacturing sector tends to be more in line with just overall confidence. But when you think about just the service area, you’re not really going to run out and get an extra haircut during the month just because you’re feeling good.

    So that’s why that manufacturing sector and paying attention to any changes within the manufacturing sector is very important. So as I said, we did see a big dry drop today in yields. And again, that yield curve, it’s slightly inverted when looking at the difference between the three-month treasury and the 10-year treasury note.

    Now, just keep in mind that typically, the yield curve should be upwards sloping. And that’s simply because your longer maturities– there’s more uncertainty around what can happen between now and when your bonds mature. So because of that, there is some yield compensation available to the investor.

    But so it’s inverted a little bit here. So that is something that we’re watching. In terms of your investments, if you think about it, right, now, cash, if you were to keep your money in cash, it’s earning about, depending on where you are, almost very close to the same level as you would get if you were to invest in a 10-year treasury note.

    So that the question we get quite a bit, well, why would I invest taken on that price risk, taking on that duration risk if I can just keep my money in cash? And the idea here is that right now, the market is thinking that, you know what– the next move by the Fed– it might not be an increase in interest rates. It might actually be a decrease in that federal funds target range.

    So what’s happening here is those longer-term yields are reflecting that potential chance of that happening. So what could happen– if you have your money in cash, and then all of a sudden there is a rate cut, those cash yields are going to drop. And they’re going to catch up what the market is doing.

    So in our view here, it’s very important, depending on what your overall time horizon is, and what your liquidity needs are. Let that dictate how you want to be positioned from a fixed income standpoint. So if you have a long-term time horizon– you don’t have any short-term liquidity needs at this point– then we would advocate for, go ahead and have a short to intermediate type fixed income portfolio,

    That way, your position, regardless, of what type of economy were to happen going forward. With that being said, though, if you have plans to buy a house, or if you have some big expense item that’s coming up, and you might need to cash– and that point, yeah– pick up those additional basis points with varied with no risk by keeping it in cash just so that you have it there for your potential needs.

    In terms of our overall thinking now of going forward, we’re not as pessimistic as the marketplace is incorporating within their trading activity. We are somewhat optimistic in a sense that given that yields are low, we think that monetary policy at this point is still somewhat accommodative.

    We think it’s an interest rate environment that’s still benign for economic growth. And although we don’t think that growth will be above 3%, we still think it’s going to be above normal. And we think that policy will be supportive if economic growth going forward.

    So although we have to be mindful that, at some point, we are going to enter a recession, because what comes up has to come back down, the reality is for us here based on what we see, we just don’t see it’s going to happen in the very near term. But we do monitor all the economic data, both here domestically and internationally as it comes in, just to see if there’s anything in there that warrants any change of direction from our side here.

    So from a fixed income standpoint, we do think that it still makes sense to go ahead and maintain your long-term view, your long-term objective– keep those funds invested in short to intermediate type investments. And just keep in mind that we are monitoring the scene at all times.

    Again, this is Jim Barnes, director of fixed income– very much enjoyed my time here with you today. Any questions, please visit us at Thank you very much.

    [AUDIO CONCLUSION/CLOSE] This has been a production of Bryn Mawr Trust, copyright 2019. Visit us online at


    The views expressed, herein, are those of Bryn Mawr Trust, as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries.

    This podcast is for informational purposes only, and should not be construed as a recommendation for any product or service. BMC Wealth Management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice.

    Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not bank deposits, are not FDIC insured, are not backed by any bank or government guarantee and may lose value. Past performance is no guarantee of future results. Insurance products not available in all states.