The continuing saga in Greece as to whether it will remain in the eurozone as it hammers out a plan with its creditors is a reminder of the fragility of the global economy as the aftershocks of the financial crisis continue to reverberate. That investors are shrugging off this and other events is evidence of either a numbing effect of the crisis or the sedating effect of quantitative easing (QE). In this case, the European Central Bank (ECB) launch of its QE program in January has not only eased tensions but also driven European rates down to very low levels if not into negative territory. Nonetheless, a “Grexit” would undoubtedly produce a bad hair day in the markets if and when it transpires.
Federal Reserve (Fed) binge watching, starring Janet Yellen has reached new heights. The debate as to whether Fed Funds hikes, or “normalization”, begin this June, September or perhaps next year fills the headlines. For investors out the curve, the question is whether these hikes will matter in lifting rates further out the curve as the market has not priced in an early hiking cycle. More prominently impacting Treasury rates is the global competition in the search for yield.
The call for higher rates may be justified by an improving U.S. economy but stubbornly low rates elsewhere dampen potential rate rises for Treasuries. In fact, negative rates are becoming more common in several countries. In this environment, U.S. Treasury yields, as low as they appear, are actually attractive. This ying and yang - an improving economy and low rates elsewhere - make rate calls in the U.S. particularly difficult. Table 1 shows the relative attractiveness of Treasuries in a global context.