Quarterly Economic Recap and Rate Outlook

The U.S. ended the second quarter in the midst of the longest economic expansion in history at 121 months … and counting.  The current growth cycle that began in June 2009 has finally bettered the 10-year “dot-com” boom of 1991-2001. Unfortunately, the pace of the current expansion has been significantly slower: +2.3% average GDP growth compared to +3.6% for the second longest and +4.3% for the third in line. But, the story of the second quarter for fixed income investors was a remarkable plunge in bond yields, and a very reluctant dovish turn in Fed thinking. The two-year Treasury shed an astonishing 50 basis points in 91 days, closing at a yield of 1.76%, while the 10-year tumbled 40 basis points to close at 2.01%.  As the Wall Street Journal pointed out, forecasters were caught off guard by the depth of the plunge.  In the Journal’s October 2018 survey, not a single one of the 50 economists surveyed expected the 10-year yield to fall below 2.75% by June 2019. In fact, the survey’s average forecast at that time was 3.39%.

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