At the end of June, the 10 Year Treasury briefly fell below 2% as demand for the government bonds soared, a sign that investor confidence in an uncertain market environment is wavering. The yield curve remains somewhat inverted, a signal to many that a recession looms sometime in the next one to three years. Dropping short term rates (maybe more than once) would flatten the inversion at the short end of the yield curve.

The spotlight stands firmly on Chairman Jerome Powell and the Federal Reserve in preparation of their meeting at the end of July. Most if not all signals, including Chairman Powell’s own comments, point to a quarter point rate decrease in July, with another cut likely by the end of the year. The Federal Reserve is responsible for setting monetary policy in the United States. The primary tools at their disposal are raising/lowering interest rates and buying/selling government debt. The Fed raises interest rates to slow rapid economic growth, much like a coach who holds the best players back at the beginning of a match, assessing the competition. Conversely, the Fed will lower rates in order to keep economic growth steady. Any impending rate cut will be the Fed’s response to bolster a slowing economy. The hope is that the U.S. continues steady economic growth as countries across Europe and Asia combat economic weakness.

Funds continue to flow from equity investments into fixed income funds, a cautious approach from most investors. Foreign investors continue to purchase U.S. Treasuries as yields abroad remain in low-to-negative interest rate territory. Despite lower rates, bonds have performed very well in the first half of 2019. U.S. bond index returns have kicked higher than 7.5% in the trailing year. That trend is unlikely to continue in the second half of 2019. We certainly don’t expect double digit bond returns in 2019. Bond prices move inversely to interest rates. As rates go down, older bonds that have higher coupons become more valuable to own and are traded at a premium. We usually depend on bonds for stability of income but performance this year can be mostly attributed to bond price appreciation. Investors should expect lower bond yields moving forward.