The Macro Report | January 2018

The yield curve puzzle

The outlook for U.S. and global growth remains solid in 2018. However, the relationship between the improving U.S. economy, the Fed funds rate, and the benchmark 10-year Treasury yield is somewhat of an enigma. The yield on the 10-year note continues to lag U.S. growth rates even as global monetary policies tighten and short-term rates rise. With benchmark yields perhaps poised to move higher, this month we explore several factors that help to determine them, including demand from foreign central banks, monetary policies across the G10 and in Japan especially, and demographics. The gap between nominal GDP growth rates and nominal yields is likely to be much wider than a “return to normal’’ would suggest in 2018.

Although markets have shown little concern over the yield disparity, we think some issues that could begin to influence markets include political tensions in Italy and higher oil prices. Italy will hold national elections in March, and the uncertainty threatens to undermine an already fragile economy. Additionally, oil prices have been spurred higher in part by protests in Iran, explosions in Libya, and Yemeni missiles over Saudi Arabia.

Mind the yield gap

Mind the yield gap

The yield on the 10-year bond, which has trailed GDP growth, is expected to rise only slightly in 2018 as market forces cap rates.

More »

About the macro report

The Macro Report is written by members of Putnam’s Fixed Income team. With backgrounds in applied economics, currency and interest-rate analysis, and sovereign and local bond market dynamics, this group conducts macroeconomic research in support of Putnam’s global fixed-income strategies.

Michael Atkin, Portfolio Manager
Investing since 1988
Sovereign debt, global growth analysis

Albert Chan, CFA, Portfolio Manager
Interest-rate derivatives, government debt, risk analysis

Onsel Emre, PhD, Analyst
Inflation, risk analysis, global growth dynamics

Sterling Horne, Analyst
Politics and economics

Irina Solyanik, CFA, Analyst
Quantitive analysis, growth forecasting

Izzet Yildiz, PhD, Analyst
Labor market analysis, global growth dynamics