As predicted, China’s rapidly decelerating economy is having an impact on the markets here in the U.S. China’s central bank has taken drastic efforts to try to prop up their economy, which only makes its struggles more obvious. This news, along with lower than expected productivity growth, has caused the U.S. Ten Year Treasury yield to drop 18 basis points in just one week. With the yield back down to 2.10%, bond traders are indicating they are losing some faith in the economic recovery.
In the bond world, this means a small uptick in values, as well as reassurance that any rate increases from the Federal Reserve will be small and slow. Developments in China have muddied the water for the Fed. It’s becoming harder to rely only on U.S. economic numbers, especially considering how intertwined the economies of the U.S. and China are (China is the largest holder of U.S. debt, at more than $1.2 trillion).
If the Fed does as many predict, and raises the federal funds target rate next month, it could be a sink or swim moment for the economy. With global pressures weighing on growth, and the bond market seeing little risk of rising inflation, a rate hike has the potential to stomp out the small ray of hope that is the budding U.S. economic recovery.
This information is not intended to be used as the only basis for investment decisions, nor should it be construed as advice designed to meet your particular needs. You are advised to seek the advice of your financial adviser, legal or tax professional, prior to making any investment decision based on any specific information contained herein.
