jpm_asset_management logo
  • Investment Strategies

    Investment Options

    • Alternatives
    • Beta Strategies
    • Equities
    • Fixed Income
    • Global Liquidity
    • Multi-Asset Solutions

    Capabilities & Solutions

    • ETFs
    • Global Insurance Solutions
    • Liability-Driven Investing
    • Pension Strategy & Analytics
    • Outsourced CIO
    • Retirement Solutions
    • Sustainable Investing
  • Insights

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Guide to Alternatives
    • Market Updates

    Portfolio Insights

    • Portfolio Insights Overview
    • Alternatives
    • Asset Class Views
    • Currency
    • Equity
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Portfolio Strategy
    • Sustainable Investing Insights

    Retirement Insights

    • Retirement Insights Overview
    • Guide to Retirement
    • Defined Contribution
  • Resources
    • Center for Investment Excellence Podcasts
    • Insights App
    • Library
    • Taft-Hartley
  • About Us
    • Investment Stewardship
    • Trusted Asset Manager
  • Contact us
Skip to main content
  • English
  • Role
  • Country
  • Client Reporting
Search
Menu
CLOSE
Search
You are about to leave the site Close
J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
CONTINUE Go Back
  1. Home
  2. Insights
  3. Market Insights
  4. Market Updates
  5. On the Minds of Investors
  6. Should I be positioned for higher yields?

  • Share
  • LinkedIn Twitter Facebook Line
  • Print
  • Actions
  • LinkedIn Twitter Facebook Line
    Print

Should I be positioned for higher yields?

08/19/2020

Jordan Jackson

Together, greater duration supply and less Fed buying suggests yields may drift higher through the back half of the year.

Jordan Jackson

Listen to On the Minds of Investors

08/19/2020

Throughout most of the second quarter, bond investors had been somewhat lulled by the relative stability in Treasury markets as the U.S. nominal 10-year Treasury traded in a fairly narrow range. However, in the first couple of weeks of August, 10-year yields jumped by ~20bps and investors are now considering if this move portends to higher yields ahead.

The initial reaction was likely caused by early signs of some inflationary pressures. Core CPI in July surprised to the upside, reporting the strongest monthly increase (0.6%) since 1991, further supported by several months of strong retail sales and consumer activity. However, even with the strong July report, the underlying trend in inflation has downshifted, particularly within the services sectors. Instead, the catalyst for higher yields may be a shift in Treasury debt issuance and Federal Reserve (Fed) purchases in the second half of the year.

In order to provide large-scale and swift stimulus to the economy, the Treasury ramped up its bill issuance, boosting the T-bill market by 2.7tn USD year-to-date. As a result, the T-bill share of the Treasury market has risen to more than 30%, the highest share since 2009. As a consequence, the weighted average maturity (WAM) of the Treasury’s debt has declined to 61.8 months as of the end of June, its shortest level since 2011. 

In response, the Treasury appears to be making a concerted effort to extend the WAM of marketable debt outstanding back toward pre-COVD levels. However, it should be recognized why this shift in duration management is taking place. The Treasury General Account (TGA) swelled to 1.7tn USD as of August 12th, up from 280bn USD at the beginning of the year, due to massive T-bill issuance and receipts from tax returns filed in July. Importantly, the TGA serves as the checking account for the Treasury and considering the expected path of PPP loan forgiveness and typical seasonal outlays, the TGA should decline only modestly through the end of the year. 

Given this, the TGA is unlikely to return to a more normal cash balance anytime soon. Therefore, borrowing further out on the curve is likely to significantly outpace deficit-financing needs this year. This is supported by the Treasury Borrowing Treasury’s Office of Fiscal Projections (OFP) financing estimates, which currently forecasts net privately-held marketable borrowing for coupon bonds of 447bn USD from July-September (Q4 FY2020), up from 331bn USD last quarter. Moreover, the Fed has steadied its pace of Treasury purchases at around 80bn USD/month in Treasuries, much lower than the 75bn USD/day pace seen in late March and early April. Together, greater duration supply and less Fed buying suggests yields may drift higher through the back half of the year.

All things considered, the Treasury’s WAM should stabilize and extend back toward pre-pandemic levels by mid- to late-2021. The clear risk to our forecast is around the size of the next fiscal package. Any package larger than our estimate of 1-1.5trn USD would require larger coupon auction sizes in the months ahead. However, while there is scope for yields to gradually move higher, COVID and election uncertainty will likely keep bond yields capped over the medium term.

Weighted average maturity of marketable debt outstanding

Months

Line graph showing Weighted average maturity of marketable debt outstanding '05-'19 

Source: U.S. Treasury Department, J.P. Morgan Asset Management.

0903c02a829b4b74

EXPLORE MORE

On the Minds of Investors

What investment questions are on the minds of investors? Explore the questions investors ask frequently and find answers at J.P. Morgan Asset Management.

Read more

Guide to the Markets

The J.P. Morgan Guide to the Markets illustrates a comprehensive array of market and economic histories, trends and statistics through clear charts and graphs.

Read more

Asset Class Views

Get quarterly commentary and in-depth analysis on equities, fixed income and other asset classes, written by our senior investment teams.

Read more
Economy
J.P. Morgan Asset Management

  • About us
  • Investment stewardship
  • Privacy policy
  • Cookie policy
  • Binding corporate rules
  • Sitemap
  • Accessibility
Opens LinkedIn site in new window
J.P. Morgan

  • J.P. Morgan
  • JPMorgan Chase
  • Chase

READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

The value of investments may go down as well as up and investors may not get back the full amount invested.

Copyright 2021 JPMorgan Chase & Co. All rights reserved.