The US economy to strengthen in spite of Russia’s threats. The short-term Treasury yield hit its highest level for almost a decade. It increased to 2.386%, its highest level since August 2008. The 10-year Treasury yield also increased to the highest level for three weeks to 2.86%. These figures will have a negative effect on bond prices as yields increase, bond prices fall. The yield curve might well flatten more on this below!
Russian Consequences Likely Financial
These movements took place once it became clear that there would be no serious conflict between the US and Russia after the Syria airstrikes. Nevertheless, investors were concerned that US economy might suffer because of these attacks on an ally of Russia. Putin stated that there would be ‘consequences’, and since it is unlikely that these ‘consequences’ would be military, they might well be financial.
Short-Term Treasury Yield Flattening
The worry is that the short-term Treasury yield is getting closer to the 10-year figure. This flattening might well lead to an economic recession the historical signs are there. If the sell-off of bonds continues, then a recession becomes closer. This was the case prior to the 2008 financial crisis and we all know what happened then!
The current economic situation is complex, with the US attitude to trade agreements with Canada and Mexico in doubt. There is also the situation with China, which may hit the Americans more than the Chinese. Maybe not – but who knows?
The US Economy to Strengthen and Inflation to Stay Low
Higher short-term yields mean that interest rates and inflation will likely stay low. Higher yields are not good for businesses with debts to pay. A higher yield means that companies pay more to finance their debts, so is a negative factor for stocks. It is generally expected that inflation will rise and that the economy will become stronger.
The Federal Reserve will likely continue to raise interest rates at a sensible level. The increase in employment and the level of growth in US manufacturing, is giving Americans an optimistic view of their country’s economy. Whether this view is justified or not will be seen once Putin’s response to the Syria attacks becomes known.
