Is the 10-Year Yield Telling Us About Inflation or the Economy? Neither, Says Well Fargo

The big dip may be forecasting exactly nothing, because other factors are making it drop, the bank argues.


The benchmark 10-year Treasury’s yield has taken a dizzying fall, finishing Friday at 1.35%, a long way down from its yearly high of 1.74% just three months ago. So that means the inflation scare isn’t a big deal and economic growth will be sub-par, right?

Maybe something else is going on. That’s the argument from Wells Fargo strategists, who wrote in a research note that “economic forces aren’t at the heart of the slide.” Instead, they found, technical issues—liquidity, positioning, and Federal Reserve bond buying—are the drivers here. Which means you can shuck the 10-year’s performance as a portent.

About liquidity: The last Treasury issuance was June 24, and no new paper is slated until later this week, Wells pointed out. Plus, last week, shortened by the July 4 holiday, investors were taking time off. In other words, a limited supply of product helped push up the price among a lower pool of buyers, which skewed the game board. Last week was marked by the biggest yield fall since the start of June, and by Wells’ estimation, that tells us zero about the future.

As for positioning, Wells cited a survey that found a significant short interest in the rates market. With prices going up, that produced a short squeeze. Presumably, the squeeze led to more buying to cover short positions. Bond shorting occurs via derivatives or through exchange-traded funds (ETFs), so it’s not readily detectable.  

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Above all, there is that relentless bond buyer, the Fed, which has continued to distort the Treasury and mortgage-backed securities (MBS) markets for some time. This “large and systematic buyer in the market” is scarfing up Treasury paper “to the tune of $80 billion a month, or approximately $20 billion a week,” the note said.

But stock investors seldom have a sophisticated grasp of the fixed-income arena, the Wells strategists wrote. They mistakenly think “the move in nominal rates is driven strictly by inflation expectations; that hasn’t been true recently,” the report stated. After all, these stock-centric folks should notice that  “inflation expectations baked into the 10-year Treasury remain in the 2.0 to 2.5% range,” they declared. What’s more, that range hardly foreshadows an inflationary surge or a new economic slide, they added.

Remember that, not long ago, the 10-year Treasury yield was expected to hit 2% this year. Maybe not anymore. But the status quo isn’t the worst thing in the world, according to this analysis.

Meanwhile, there’s a movement among some Fed officials to taper the bond buying, likely whittling the MBS purchases first. After all, housing is booming. Perhaps such a move will lead to lower bond prices and higher yields. One certainty: The Fed doesn’t want to make stuff happen quickly.

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Pension Funds Should Report Performance on a Monthly Basis, Markov Says 

An analysis of portfolios using a returns-based lens would help some funds improve transparency, the investment researcher advises. 


All public pension plans in the US should start reporting their returns on a monthly basis to improve transparency at their funds, say researchers at Markov Processes International (MPI). 

Moving to monthly data reporting happens to be something the New Jersey-based investment researcher could help with. The company has built its business using returns-based techniques to evaluate whether financial disclosures at funds match up with their asset allocations. 

“It’s a perfect due diligence—quick and precise due diligence—tool,” said Michael Markov, co-founder and chairman of MPI. “It doesn’t require a connection to a custodian.” 

The analysis helps the firm measure what assets portfolios are exposed to, what risks a fund has taken, and whether the level of risk is appropriate for the fund. It could also help disclose some hidden fees and expenses, Markov said, that can help people “understand all the decisions” that go into investments. 

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“With the proper analysis, it gives a lot of transparency and then transparency can be understood in different ways,” Markov said. 

MPI, which was founded in 1992, is known for its returns-based analysis, which is based on the investment research methodology designed by American economist and Nobel Memorial Prize winner Bill Sharpe. 

MPI used that same analysis on Norges, the $1.3 trillion Norwegian sovereign wealth fund, to review how well its asset allocation linked up with its monthly public disclosures. After breaking down the fund’s allocation by asset class, then region, then factors, MPI discovered that the composition of the fund lined up with the fund’s financial disclosures.

Norges moved more toward equities, and away from bonds, over the course of more than two decades, MPI found. Within equities, the sovereign wealth fund also tilted more to European and developed markets over time. Those findings also line up with disclosures the fund has made to its stakeholders, helping it build a reputation for transparency, MPI said. 

The same monthly returns analysis can help provide insight into public pension funds in the US that are less transparent, the researchers said. It’s a concern for a number of pension funds that have recently been swept up in transparency scandals in states such as Pennsylvania and California.  

But skeptics disagree with the investment researchers. Some allocators argue that reporting returns on a monthly basis—as opposed to a quarterly or annual timeline—could encourage a short-term outlook on investments, when institutional investors operate over a longer time horizon. Many assets managed at public pension funds may underperform in the near term, but outperform as time wears on, they say. 

For public pension funds that do need to improve transparency, critics say it’s far more important that allocators learn how to communicate their investment processes to their board trustees. 

Understanding trustees’ risk tolerance, walking board members through the ins and outs of opaque investments, and setting expectations for performance are all more fundamentally needed to encourage transparency at pension funds than is more frequent reporting, allocators say.  

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