Some more thoughts on the puzzling behaviour of Treasuries

Last week’s behaviour of the Treasury market is puzzling for two reasons. First, a further paring back of expectations for tighter monetary policy following the Fed’s mid-week meeting might reasonably have been expected to reduce the yields of shorter-dated bonds by more than those of their longer-dated counterparts. Yet, there was a bull flattening of the yield curve out to the 6-year mark. Second, the reduction in the implied real yield of 10-year Treasuries – and in the actual real yield of 10-year TIPS – coincided with a renewed outperformance within the US stock market of some COVID-19 vulnerable sectors, amid news of a new treatment developed by Pfizer that is reportedly extremely effective at reducing the risk of hospitalisation and death from the virus. This is the opposite of what happened this spring and to a lesser extent in September.