Rising uncertainty and a flight to safety
The yields on long-term Treasury securities have fallen to the bottom of their recent trading ranges, with the 10-year bond testing 4% and the 30-year note dropping below 4.7% in the third week of February.
We see these latest down moves as a response to several factors, including rising geopolitical risk, continuing trade uncertainty, mounting concerns over the impact of artificial intelligence on other industries as well as increasing questions surrounding the health of private credit companies.
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The bond market looks to be a bit overbought given the direction of growth in the first quarter, which we expect to move above 4%, and the risk that inflation will move well above 3% in the near term.
The questioning of the value of tech stocks surfaced last November, leading to a drop in equity prices and a flight to the safety of Treasury securities.
The increase in uncertainty is evident in the up-and-down pricing of the tech-heavy Nasdaq and S&P 500 since November, more recently, the selloff in many technology stocks.
Whether this flight to safety becomes more than a temporary market move is likely to be affected by the potential of increased geopolitical risk in the Middle East. A rise in tensions would most likely increase the demand for Treasury securities, pressuring yields lower than what we consider to be fair value.
The takeaway
The bond market has reacted to increased uncertainty in the equity market. The result is a flight to the safety of Treasury securities, which has pushed long-term interest rates lower.
