US Treasuries: Decline in real yields rather than in inflation expectations - BBH

The analysis team at BBH explains that in the US Treasuries, they note that the decline in yields since the FOMC hiked rates last month has been chiefly a decline in real yields rather than in inflation expectations.  

Key Quotes

“The nominal yield has fallen more than 40 bp, while the 10-year breakeven eased bout 15 bp.  There seems to be three hypothesis.  The first is that the decline in real rates is a function of safe haven demand even though the US is at the center of the geopolitical tensions.  The second is that investors' faith in Trump to deliver on his economic promises has been shaken.  Third, the divergence is exaggerated by the liquidity differences, and more a statistical quirk than a window into market psychology.”

“The June 10-year note futures closed at the 38.2% retracement objective (126-02) of the sell-off since the US election last November.  The 50% retracement is 127-00.  The Slow Stochastics may be showing a bearish divergence insofar as it has not confirmed the new highs, though the RSI and MACDs allow room for additional near-term gains.    The contract has fallen in one session in each of the past two weeks.  It has rallied for six consecutive weeks, the longest since last June-July.   We will be watching for a reversal signal.”