Updated: 07-31-2015

With Greece coming to terms for its latest bailout package, it looked like things were finally back on the right track in global debt markets. A stream of poor economic data at the end of the week, however, suggested that underlying global growth trends were not as strong as previously thought.

Poor flash PMI readings from Europe and Asia helped spur a flight to quality, which pushed official government bond yields down.

7/24/2015 7/17/2015 Change
Fed Fund Futures Rate Prediction Dec. 2015 (57.1%) Dec. 2015 (62.6%) ---
10yr Treasury - 2yr Treasury 157 bps 166 bps -9 bps
High Yield - 10yr Treasury 497 bps 464 bps 33 bps
Corp A - 10 yr Treasury 123 bps 120 bps 3 bps
10 yr Bund - 10 yr Treasury -156 bps -154 bps -2 bps
5yr, 5yr Forward Inflation Breakeven 2.11% 2.15% -4 bps

Overall, the U.S. 10-year Treasury yield fell 7 basis points (bps) from the previous Friday's close. The decline in yields was a global phenomenon and not based on U.S. economic trends.

In fact, the latest U.S. economic data were largely within expectations. Sales of existing homes showed a positive economic surprise. That was offset by an equal, but opposite, disappointment in new home sales.

The 2/10 year Treasury curve flattened by almost 10 bps to 157 bps. That is the narrowest the spread has been since June 1.

Economically speaking, the flatter curve is likely representing the market's realization that Fed rate hikes during the upcoming tightening cycle will be slower and more deliberate than in the past. Instead of a hike at every session, which is the typical pace, Chair Yellen has implied that there may be a few meetings in between hikes.

That explains why the fed funds futures prediction for the first rate hike hasn't materially changed over the past several weeks while the expected fed funds rate in May 2018 has fallen by nearly 20 bps.

Another leg down in crude prices added significant pressure to the idea that fracking companies might not be able meet their debt obligations. That sent high-yield debt yields screaming higher, and the spread-to-Treasuries rose 33 bps to 497 bps. The risk premium on high-yield debt is the highest since the spread regularly exceeded 500 bps in February 2015.

Global economic concerns weakened the investment-grade outlook. The spread-to-Treasuries increased 3 bps to 123 bps. Despite what looks like a relatively modest increase in the risk premium, investment-grade debt is being traded at its riskiest point since June 2013.

Weak global economic concerns pushed German 10-year bund yields down 9 bps to 0.71%. That was in-line with trends in U.S. debt.

German 10-year yields haven't consistently been at these levels since the beginning of June.

The five-year, five-year forward inflation breakeven has been well anchored between 2.00% and 2.20% since the beginning of April.

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