A New Year, New Expectations in the US Treasury Market
The slide in oil prices in October accounted for most of the move in 10-Year US Treasury bonds via the inflation risk component of the term premium. The two series are always highly correlated and this is a mechanism through which oil price changes are incorporated into US Treasury pricing.
This year, there are two new dynamics at work in the bond market. The first is falling TIPS yields, which offers some information about the growth outlook. The yield on 10-Year TIPS has fallen from about 1.15% in October to 76bps currently. For a security with a roughly 7-year duration, that 40bps decline in yield is a decent 2.8% return… when equity markets have lost 10+%.