Ranges Are Meant to be Broken

May 2018

By the end of April, markets – government bonds, credit and equities – were consolidating around current levels as recent economic data is digested. With the exception of the U.S., there has been a notable decline in economic growth indicators since the beginning of the year. Although the latest readings are still consistent with the global economy growing at a healthy rate, markets have begun to worry about the sustainability of the low inflation/strong growth narrative. On the back of this wariness, 10-year U.S. Treasuries have settled into a 2.80-3.00 percent range. The market’s split mind is evidenced by its unwillingness to push U.S. 10-year yields above 3 percent, the post-crisis high previously achieved in early 2014. In other words, will the U.S./global economy break out of its 2007-2017 range (i.e., ending secular stagnation) or will the global economy drift back to mediocrity (or worse) in the year(s) ahead. While the better earnings and economic data have not pushed credit spreads tighter, they have helped them stabilize around current levels. However, the risk is new economic data (better or worse) could force the market to revise its expectations again. As they say, ranges are meant to be broken.