Graphic: Trouble with the curve

The FOMC’s vote to increase the federal funds rate 25 basis points on June 14 raised the implied floor for short-term interest rates, but the impact becomes less predictable farther out on the curve. Inflation expectations influence long-term bond yields as investors express their views of future growth through their activity.
Flattening: Near-term rates responded to the June hike accordingly, while long-term rates fell on lower growth and inflation sentiments. The 2/10 spread fell 10 basis points since the end of May, while the 2/30 spread fell 20.
New normal: Low fuel prices and struggling retailers factor into low inflation, making investors question whether 2% annual growth is no longer realistic.
Strong returns: Long government bonds have handily outperformed their intermediate- and short-term counterparts in 2017, and three- and five-year periods, while duration caught up to them in the period after the 2016 election.
Demand up: Outperformance is in part due to increasing demand for longer-termed bonds from corporate pension plans that are looking to match liabilities through LDI strategies.
*Non-seasonally adjusted. Sources: Bloomberg LP; P&I Research Center
Compiled and designed by Charles McGrath and Gregg A. Runburg