Real yields are more likely to fall than rise from here. Even if the trade confrontation were to be resolved tomorrow, we would still project US growth to decline in mid-year and end 2019 below consensus expectations. The longer the trade row drags on, the greater the downside risk to our view.
Sharp fall in breakevens masking the recent stability of real yields. As we noted above, the large drop in nominal yields this quarter has been paced by inflation rather than growth. Real yields are currently at the bottom of their recent range; any further fall in yields could tip them into a new, lower range.
We buy TIPS via the TIP US ETF (which tracks the performance of the whole TIPS market; note there is no “s” in the ticker) at 114.20 and set an initial stop 2% away, just below 112.
Growth and inflation expectations faded. We closed the trade on 24 July for a total return of 29bps.