Developed Countries

Following up on our May 30th Chinese apparent diesel demand and SPX momentum pictorial, the latest KOMATSU monthly demand growth rate update on Chinese excavator sales corroborates the plunging diesel demand data (as a reminder most earthmoving machinery are diesel-powered). In more detail, over the last three months ending in May, KOMATSU Chinese excavator sales have registered -10%, -16% and -27% year-over-year contraction rates, respectively.1 Such an accelerated decline is telling. Japanese construction machinery companies are not tangled up in the U.S./China trade tussle, at least not yet, so this appears to be a clean/reliable number. Moreover, it seems as though infrastructure spending is not the preferred way to stimulate the Chinese economy at the current juncture. This is important and likely serves as a near-real time indicator of Chinese reflation efforts translating into economic activity. The chart shows that in late-2015/early-2016 this economic data series went parabolic, led the U.S. stock market and clearly signaled that a Chinese reflationary push was being successful. Currently, excavator sales data suggest that Chinese reflation is either delayed or the transmission mechanism is broken, warning that U.S. stocks are in danger of disappointment. Bottom Line: Broad U.S. equity market caution is still warranted. Footnotes 1https://home.komatsu/en/ir/demand-orders/__icsFiles/afieldfile/2019/06/07/201903main_products_order_e_0607.pdf

Since early March, when we first turned tactically cautious on the prospects of the broad equity market, we started applying risk metrics to our portfolio in order to protect profits. In recent weeks as our cautiousness morphed from a tactical into a cyclical time horizon, we have both added more stops and also tightened existing trailing stops to our portfolio. As a result, our long S&P homebuilding/short S&P home improvement retail market- and sector-neutral trade got stopped out last week at the 10% return mark since the January 22nd, 2019 inception. Bottom Line: We have been increasingly using risk management metrics to protect gains in our U.S. equity portfolio and we are obeying the trailing stop on the long S&P homebuilders/short S&P home improvement retailers pair trade for a gain of 10% since inception. 

Highlights Fed: Depressed U.S. Treasury yields now discount more rate cuts than the FOMC is likely to deliver, even for “insurance” purposes to offset the negative growth impacts from trade policy uncertainty. Maintain a below-benchmark strategic U.S. duration stance, and stay underweight the U.S. in global hedged government bond portfolios. JGBs: The low yield beta of Japanese government bonds can be a useful diversifier of duration risk in global government bond portfolios. We recommend taking advantage of this by increasing allocations to Japan, out of U.S. Treasuries, on a currency-hedged basis (in USD). Feature June FOMC Preview: Hawks & Doves, Living Together, Mass Hysteria! The next two days will be critical for global bond markets, with the U.S. Federal Reserve set to update its outlook for U.S. monetary policy. The only logical interpretation of current market pricing is that bond investors now expect a major hit to U.S. (and global) business confidence and economic growth from a U.S.-China trade war - without any lasting pickup in U.S. inflation from the tariffs. The Fed is stuck in a difficult position at the moment. Looking purely at the state of the economy, there is no immediate need for rate cuts. The unemployment rate is still low at 3.6%; real GDP growth was a solid 3.1% in Q1 and the Atlanta Fed’s GDPNow model estimates Q2 growth will be a trend-like 2.1%; and consumer confidence remains healthy. Our Global Duration Indicator has hooked up, driven by an improving global leading economic indicator and stabilizing economic sentiment surveys. Yet despite this, U.S. Treasury yields have melted down to levels consistent with much weaker economic growth and inflation, with -83bps of Fed rate cuts now discounted over the next twelve months (Chart of the Week). Chart of the WeekToo Much Economic Pessimism Now Discounted In U.S. Treasury Yields Chart 2U.S. Business Confidence: Fraying On The Edges The only logical interpretation of current market pricing is that bond investors now expect a major hit to U.S. (and global) business confidence and economic growth from a U.S.-China trade war - without any lasting pickup in U.S. inflation from the tariffs. Reducing interest rates now would be the appropriate pre-emptive policy response, even if the current health of the economy does not justify a need to ease. A look at various U.S. business confidence surveys confirms that interpretation. Both the NFIB Small Business Confidence index and the Duke CFO U.S. Economic Outlook index are still at fairly high levels, but have clearly softened in recent months (Chart 2, top panel). The deterioration in the Duke CFO measure has come from a sharp fall in the percentage of respondents who are more optimistic on the U.S. economic outlook – a move mirrored by the deterioration in the Conference Board’s survey of CEO Confidence (second panel).   On the inflation side, the Duke CFO survey shows that companies have dramatically cut back on their planned increases for labor compensation over the next year, from 5.1% in the March survey to 3.8% in the June survey (third panel). Plans for price increases over the next year have also collapsed from 2.7% to 1.4% in the June survey (bottom panel). As the FOMC deliberates, the doves will make the following case for an insurance rate cut now (Chart 3): The U.S. manufacturing sector has caught up with the global downturn. Market-based inflation expectations remain below levels consistent with the Fed’s 2% PCE inflation target (between 2.3% and 2.4% using CPI-based TIPS breakevens). The 10-year/3-month U.S. Treasury yield curve remains inverted, typically a sign that monetary policy has become restrictive. The trade-weighted dollar remains near the post-crisis highs, even as U.S. bond yields have plunged. Global economic policy uncertainty remains elevated. Meanwhile, the hawks on the FOMC will argue that easing would be premature (Chart 4): Chart 3The Case For Fed Rate Cuts Chart 4The Case Against Fed Rate Cuts U.S. equities are only 2% below the all-time high. High-yield spreads are stable and nowhere close to the peaks seen during previous bouts of market turmoil. A similar argument applies for market volatility, with the VIX index also relatively subdued in the mid-teens. Global leading economic indicators are bottoming out. Underlying realized inflation trends – average hourly earnings growth, trimmed mean inflation measures – are sticky, at cyclical highs. Given the compelling arguments on both sides, the most likely outcome tomorrow will be the Fed holding off on cutting rates, but making a clear case for what it will take to ease at the July 30-31 FOMC meeting. We imagine that checklist to include: a) Failure of U.S.-China trade talks at the G-20 summit later this month to progress toward an agreement. b) The June U.S. Payrolls report, to be released on July 5th, confirming that the soft May reading was not a one-off. c) The June Consumer Price Index report to be released on July 11th, and the May PCE deflator reading out on July 28th, showing no acceleration of some of the “transitory” components that the Fed believes has been dampening U.S. core inflation. d) A major pullback in U.S. equities and/or a widening of U.S. corporate bond spreads, leading to tighter U.S. financial conditions. Chart 5The Market & FOMC Disagree On The Terminal Rate A new set of FOMC economic projections will be unveiled at this meeting, providing the intellectual cover for the Fed to signal that a rate cut is imminent. A new set of interest rate projections will also be provided. While this current edition of the FOMC has been downplaying the importance of the message implied by those interest rate projections, any movement in the “dots” will be noticed by the markets. The dot plot has only existed in a phase of expected Fed tightening. A shift to a projected ease would be momentous. In particular, any shift in the longer run “terminal rate” dot would be critical to ascertaining the Fed’s reaction function (Chart 5). This is especially true given the wide gap between our estimate of the market expectation of the terminal funds rate for this cycle (the 5-year U.S. Overnight Index Swap rate, 5-years forward, which is currently at 2%) and the median FOMC member estimate of the terminal rate from the last set of economic projections in March (2.8%). If the Fed were to make the case for an insurance rate cut tomorrow, while also lowering the terminal rate estimate, this would suggest that the FOMC was growing more concerned over the medium-term economic outlook as fewer future rate hikes would be needed. More dovish guidance on near-term rate moves, but without any change in the terminal rate projection, would imply that the Fed would view any insurance rate cut as a temporary measure that would need to be reversed at a later date if global uncertainty abates, U.S. growth recovers and U.S. inflation rebounds. Whatever the outcome of this week’s FOMC meeting, U.S. Treasury yields now discount a lot of bad news on both growth and inflation. Both the real and inflation expectations component of the benchmark 10-year Treasury yield are at critical support levels (Chart 6), suggesting that yields can only decline further in the face of incrementally more bearish economic data. Given the risk/reward tradeoff of yields at current levels, we do not recommend chasing this Treasury market rally, and prefer to position for an eventual rebound in yields. Chart 6Not Much Downside Left For Treasury Yields It is possible that the Fed gives a message this week that is more hawkish than the market expects, similar to last December, leading to a sharp selloff in risk assets that temporarily pushes the 10-year Treasury yield to 2%. Such an outcome would eventually force the Fed’s hand to cut rates down the road to offset the tightening of financial conditions and stabilize equity and credit markets. This will eventually trigger a rebound in Treasury yields via rising inflation expectations and investors’ moving out of bonds into risky assets. Given the risk/reward tradeoff of yields at current levels, we do not recommend chasing this Treasury market rally, and prefer to position for an eventual rebound in yields. Bottom Line: Depressed U.S. Treasury yields now discount more rate cuts than the FOMC is likely to deliver, even for “insurance” purposes to offset the negative growth impacts from trade policy uncertainty. Maintain a below-benchmark strategic U.S. duration stance, and stay underweight the U.S. in global hedged government bond portfolios. JGBs As A Duration Management Tool In Global Bond Portfolios It has been quite some time since we have discussed Japanese government bonds (JGBs) in this publication. That is for a good reason – they are an incredibly boring asset. We can think of many more interesting investments than a bond market with no yield, no volatility, no inflation and a central bank with no other viable policy options. Yet low Japanese interest rates make borrowing in yen a good source of funding for carry trades. JGBs also offer the usual safe-haven appeal during periods of risk aversion and recessions. JGBs are a low-beta sovereign bond market, making them a useful way to manage duration risk in a global bond portfolio – especially in environments like today, where JGB yields are higher than U.S. Treasury yields on a currency hedged basis (in U.S. dollars). Chart 7JGBs Are Essentially A 'Global Duration' Bet Most relevant for global bond investors - JGBs typically outperform their developed market peers during periods of rising global bond yields, and vice versa. That can be seen in Chart 7, where we show the total return of the Barclays Bloomberg Japan government bond index, hedged into U.S. dollars, on a duration-matched basis to the Global Treasury index. That return is plotted versus the overall Global Treasury index yield-to-maturity. The correlation is clear from the chart: JGBs outperform when the global yield rises, and underperform when the global yield is falling. In other words, JGBs are a low-beta sovereign bond market, making them a useful way to manage duration risk in a global bond portfolio – especially in environments like today, where JGB yields are higher than U.S. Treasury yields on a currency hedged basis (in U.S. dollars). For bond investors with a view that U.S. Treasury yields have fallen too far and are likely to begin rising again, JGBs are a compelling alternative. Selling Treasuries for JGBs, and hedging the currency risk back into U.S. dollars, can be a way to gain a yield pickup while reducing sensitivity to U.S. bond yield changes (i.e. duration) by owning an asset with a low, or even negative, beta to Treasuries. Chart 8BoJ Needs To Ease, But Options Are Limited Japan’s export-led economy is sputtering on worries over U.S.-China trade tensions which are dampening global growth sentiment more broadly. The Bank of Japan’s (BoJ) widely-watched Tankan survey shows that business confidence has turned more pessimistic; the manufacturing PMI has fallen below 50; and the OECD leading economic indicator for Japan is falling sharply. Even with the unemployment rate at a multi-decade low of 2.4%, wage growth remains muted and consumer confidence is softening. Our own BoJ Monitor is signaling the need for easier monetary policy, and there are now -9bps of rate cuts discounted in the Japanese Overnight Index Swap curve (Chart 8). The BoJ’s policy options, however, are limited. The official policy rate (the discount rate) is already negative, and pushing that lower risks damaging Japanese bank profitability even further. More dovish forward guidance is of limited impact with markets already priced for a prolonged period of low rates. The BoJ cannot pursue more quantitative easing (QE) either, as it already owns nearly 50% of all outstanding JGBs - a massive presence that has, at times, disrupted functionality in the JGB market. There is nothing on the horizon indicating that JGB yields will move much from current levels, allowing JGBs to maintain their defensive status in global bond portfolios. The only real policy tool left is Yield Curve Control (YCC), where the BoJ has been targeting a 10-year JGB yield close to 0% and managing purchases to sustain the yield target. In our view, any upward adjustment of that yield target range (currently 0-0.2% on the 10yr JGB) would require a combination of three factors: The USD/JPY exchange rate must increase back to at least the 115-120 range, to provide a lower starting point for the likely yen appreciation that would occur if the BoJ targeted a higher bond yield. Japanese core CPI inflation and nominal wage growth must both rise and remain above 1.5%, which is close enough to the BoJ’s 2% inflation target to justify an increase in nominal bond yields. The momentum in the yield differential between 10-year Treasuries and JGBs must be overshooting to the upside; the BoJ would not want to keep JGB yields too depressed for too long if the global economy was strong enough to boost non-Japanese yields at a rapid pace. Chart 9BoJ Yield Curve Control Is Here To Stay Currently, none of those criteria is in place (Chart 9). USD/JPY is down to 108; core CPI inflation is 0.6%; real wage growth is effectively zero; and the 10yr U.S.-Japan bond spread is contracting. There is nothing on the horizon indicating that JGB yields will move much from current levels, allowing JGBs to maintain their defensive status in global bond portfolios. Changes to our model bond portfolio We have been recommending an overweight stance on JGBs in our model portfolio for much of the past two years. This is in line with our long-held view that global bond yields had to rise on the back of improving global growth and the slow normalization of interest rates by the Fed and other central banks not named the Bank of Japan. Events this year have obviously challenged that view and we have reduced the size of our recommended overweight in our model bond portfolio. Given our view that U.S. Treasury yields are likely to grind higher in the next few months, we see a need to turn to Japan as a way to play defense against a rebound in global bond yields. That means increasing the Japan allocation, and decreasing the U.S. allocation, in our model bond portfolio. We can fine-tune that allocation shift based on the empirical yield betas of U.S. Treasuries to JGBs across different maturity buckets. In Chart 10, we show the rolling 52-week yield beta of JGBs to the other major developed bond markets, shown at the four critical yield curve points (2-year, 5-year, 10-year and 30-year). In all cases, the yield beta is low and fairly consistent across all maturities. When looking at those same rolling betas using yields hedged into U.S. dollars, shown in Chart 11, the story changes (note that we are using hedged yield data from Bloomberg Barclays, so the maturity buckets correspond to those used in the benchmark indices). The yield betas between JGBs and other markets are at or below zero in the 3-5 year and 7-10 year maturity buckets, with particularly large negative betas versus U.S. Treasuries. This implies that there is a gain to be made by focusing any Japan-for-U.S. switch in currency-hedged global bond portfolios on bonds with maturities between three and ten years. Chart 10JGBs Are Low-Beta To Global Yields... Chart 11...And Even Negative-Beta After Hedging Into USD Based on this analysis, and our view on U.S. Treasuries laid out earlier in this report, we are making a shift in our model bond portfolio on page 12 – cutting the weight in the maturity buckets in the middle of the Treasury curve and placing the proceeds into similar maturity buckets in Japan. Bottom Line: The low yield beta of Japanese government bonds can be a useful diversifier of duration risk in global government bond portfolios. We recommend taking advantage of this by increasing allocations to Japan, out of U.S. Treasuries, on a currency-hedged basis (into USD).   Robert Robis, CFA, Chief Fixed Income Strategist rrobis@bcaresearch.com Ray Park, CFA, Research Analyst ray@bcaresearch.com   Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights June FOMC Meeting: To appease markets, the Fed will at least have to signal that it stands ready to cut rates in July. While this is possible, there is a significant risk that the committee fails to deliver. We continue to advocate a cautious approach to corporate credit spreads in the near-term (0-3 months). Rate Cuts: The historical track record suggests that the 10-year Treasury yield can rise or fall in the immediate aftermath of a Fed rate cut. With a U.S. recession still far off, we see a good chance that Treasury yields will rise during the next 6-12 months, even if the Fed lowers rates in June or July. Treasury Yields: Yields have fallen a lot since the beginning of November, but the move isn't terribly anomalous relative to history. We use statistics to place recent price action in its appropriate historical context. Feature The Fed This Week Chart 1Credit Spreads At Risk Tomorrow’s FOMC meeting is the main event in financial markets this week, with investors of all stripes eager to learn whether the Fed will deliver on the rate cut expectations that have already been priced into bond yields. As we’ve written in prior reports, our immediate concern is that the Fed may not sound dovish enough to appease markets, leading to further near-term widening in corporate bond spreads.1 Corporate bond excess returns have far outpaced commodity prices of late (Chart 1), leaving the sector vulnerable to any hawkish surprise. What’s Priced In, And Can The Fed Deliver? How dovish must the Fed be to prevent a sell-off in corporate credit? A look at current fed funds futures pricing shows that the market is looking for nearly three 25 basis point rate cuts spread over the next six FOMC meetings (Table 1). Roughly, the market expects one rate cut at either the June or July meeting, a second rate cut in either September or October, and a third rate cut in either December or January. To appease markets, the Fed will at least have to revise its 2019 funds rate projections down and signal that it stands ready to cut rates in July (Chart 2). While this is possible, there is a significant risk that the committee fails to deliver. We continue to advocate a cautious approach to corporate credit markets in the near-term (0-3 months). Table 1Fed Funds Futures: What's Priced In? Chart 2Watch For Dot Plot Revisions   Fed Rate Cuts: A Track Record While we are cautious on corporate spreads in the near-term, we are also not willing to chase Treasury yields lower from current levels. Our view is that while the Fed might deliver a rate cut at one of the next few meetings, it is unlikely to lower rates by more than the 84 bps that are priced into the yield curve for the next 12 months. Ultimately, we expect Treasury yields to be higher on a 6-12 month horizon, even if the Fed cuts rates during the next few months. In response to this outlook, a few clients have asked whether it is possible for Treasury yields to rise so soon after a Fed rate cut. While we see no theoretical reason why it shouldn't be possible, it is always a good idea to stress test a theory against the historical track record. We therefore compiled a list of every Fed rate cut since 1995, and looked at how the 10-year Treasury yield reacted to each event. The results are displayed in Tables 2A-2D.   Table 2A shows the rate cuts that the Fed delivered in the mid-1990s, in response to persistently low U.S. inflation and slowing growth in the rest of the world. At the time, overall U.S. economic growth was quite solid and the U.S. economy didn’t fall into recession until 2001. The divergence between relatively strong U.S. economic growth and slower growth in the rest of the world makes the period look very similar to today, and we have long argued that the current cycle should be viewed in the context of the mid-1990s.2 Table 2A reveals that, on average, the 10-year Treasury yield tended to rise in the months following a rate cut, often even in the first 21 days. The historical track record suggests that the 10-year Treasury yield can rise or fall in the immediate aftermath of a Fed rate cut. Table 2C shows the rate cuts that were delivered during the economic recovery of the mid-2000s, and it paints a similar picture as Table 2A. In particular, the 10-year Treasury yield rose dramatically following the 2003 rate cut, and the Fed actually started to hike interest rates almost exactly one year after the 2003 cut. Tables 2B & 2D show the rate cuts that led into the 2001 and 2008 recessions. Not surprisingly, yields were much more likely to fall after the Fed cut rates in those episodes. Bottom Line: The historical track record suggests that the 10-year Treasury yield can rise or fall in the immediate aftermath of a Fed rate cut. The yield is much more likely to fall if the cut occurs in the run-up to a recession. With a U.S. recession still far off, we see a good chance that Treasury yields will rise during the next 6-12 months, even if the Fed lowers rates at one of the next few FOMC meetings. Treasury Yield Moves: A Track Record In recent weeks a BCA client who had been shaking his head at the large drop in Treasury yields reached out to see if we could put the recent moves in historical context. Specifically, he wondered how often such large yield moves have occurred in the past, and whether there is a tendency for moves of this magnitude to mean-revert. Our U.S. Investment Strategy team took a stab at answering these questions. The below analysis first appeared in last week's U.S. Investment Strategy report, but is re-printed here for the interest of U.S. bond clients.3 The ongoing decline in bond yields has felt like a big deal in real time, but it isn’t historically. The sharp decline in the 10-year Treasury yield that began in early November can be viewed as three separate declines (Chart 3). In the first, the 10-year yield fell by 68 basis points (“bps”) over a span of 37 trading days. After retracing a third of the decline over the next 11 sessions, it slid by another 40 bps over 48 days. Following a one-half retracement over the ensuing 13 days, it shed 53 basis points in 32 days, capped off by a 36-bps decline across the final eight sessions (Table 3). Chart 3The Path To 2.07% Table 3A Lower 10-Year Treasury Yield In Three Steps Using the daily 10-year Treasury yield series beginning in 1962, we compared the individual yield declines for prior 37-, 48- and 32-day periods, as well as for the aggregate 141-day session spanning the entire stretch from the November 8th peak to the June 3rd trough. We also looked at the May 21st to June 3rd crescendo relative to past eight-day segments. The standardized moves range from three-quarters of a standard deviation below the mean for the 48-day middle leg to 1.5 and 1.8 for the 37- and 8-day moves, respectively (Table 4). All in all, the entire move grades out to 1.3 standard deviations below the mean – a somewhat unusual move, but nothing too special. Table 4Standardized Values Of Nominal 10-Year Treasury Yield Declines The current decline’s relative stature is undermined by the wild volatility of the late ‘70s and early ‘80s, when bond yields and annual inflation reached double-digit levels (Chart 4). To try to place the current episode on a more equal framework, we also calculated standardized moves in real (inflation-adjusted) yields. On a real basis, however, the current moves made even less of a splash. The 8-day decline (z-score = -1.2) was the only component that was more than a standard deviation from the mean, and the overall move amounted to just 0.7 standard deviations below the mean (Chart 5). Chart 4No Historical Anomaly In The Current Market Chart 5Little Impact In Terms Of Real Yields We are familiar with the electronic financial media’s increasingly popular convention of stating daily yield moves in proportion to the previous day’s closing yield.4 That convention has the advantage of fitting snugly aside stock price quotes on TV and computer screens, but it is ultimately nonsensical. The proportional change in a bond’s yield relative to its starting yield doesn’t come close to approximating the change in the value of that bond. Comparing proportional changes in bond yields across timeframes would be a way of putting today’s yield moves on a more equal footing with yield moves in the high-inflation, high-coupon era of the late seventies and early eighties, but it conveys no practical information. The standardized moves in real yields and Treasury index returns haven’t been a big deal. Our next steps were instead to compare Treasury total returns and the change in the slope of the yield curve to past flattening and steepening episodes. The moves here were also unavailing over both seven- and one-month periods, as the high-coupon ‘70s and ‘80s still dominated (Chart 6). In terms of the change in the 10-year Treasury yield, both nominal and real; Treasury index total returns; and the slope of the yield curve (3-month rate to 10-year yield), both the aggregate move since last October and its three component moves have amounted to one-standard-deviation events. They would only have had about a one-in-six chance of occurring randomly in a normally distributed population, but they do not represent unsustainable moves that cry out to be reversed. Chart 6Little Impact In Terms Of Treasury Total Returns, ... Digging a little deeper to consider total returns across different regions of the yield curve, we do find one apparent anomaly at the long end of the curve. The long Treasury index has outperformed the intermediate Treasury index by a two-standard-deviation margin over both a seven-month and a one-month timeframe (Chart 7). On a standalone basis, the long Treasury index has beaten the seven-month mean return by one-and-a-half standard deviations, and the one-month mean return by two standard deviations (Chart 8). The two-standard-deviation results would only be expected to occur one out of forty times, and thereby validate our client’s sense that something has been going on. Chart 7... But The Spread Between Long- And Intermediate-Index Returns Is Wide, ... Chart 8... And Long-Maturity Returns Have Been Elevated The margin by which long-maturity Treasuries have outperformed intermediate-maturity Treasuries is unusual, and history suggests it will be partially unwound over the next six to twelve months. Moving on to the second part of his inquiry, we reviewed the standalone performance of the long Treasury index, and the relative long-versus-intermediate performance, over subsequent six- and twelve-month periods. We focused our analysis on instances when historical z-scores were greater than or equal to their current levels to try to determine if we should expect current performance to reverse and, if so, how sharply. On a standalone basis, long Treasury index performance has gently reverted to the mean over the subsequent six and twelve months, posting returns over those periods within +/- 0.2 standard deviations of its long-run average (Table 5). Table 5Standardized Values Of Future Long-Maturity Treasury Index Returns Outlying relative long-versus-intermediate performance like we’ve witnessed over the last seven months has reversed more convincingly. The long Treasury index has underperformed its intermediate-maturity counterpart over six and twelve months when its z-scores were greater than or equal to their current levels over a seven- and one-month basis, falling roughly 0.5 standard deviations below the mean (Table 6). The future does not have to resemble the past, especially over small sample sizes, but relative long-end underperformance would accord with our constructive view of the U.S. economy. Table 6Standardized Values Of Future Difference Between Long- And Intermediate-Maturity Treasury Index Returns Ryan Swift, U.S. Bond Strategist rswift@bcaresearch.com Doug Peta, CFA Chief U.S. Investment Strategist dougp@bcaresearch.com Footnotes 1      Please see U.S. Bond Strategy Weekly Report, “Hedge Near-Term Credit Exposure”, dated May 28, 2019, available at usbs.bcaresearch.com 2      Please see U.S. Bond Strategy Weekly Report, “Tracking The Mid-1990s”, dated June 11, 2019, available at usbs.bcaresearch.com 3      Please see U.S. Investment Strategy Weekly Report, “Context”, dated June 10, 2019, available at usis.bcaresearch.com 4      If a bond yielding 3% at Friday’s close ends Monday’s session with a yield of 2.94%, 6 bps lower, its yield is shown as having declined 2% on the day (-.0006/.03 = -2%). Fixed Income Sector Performance Recommended Portfolio Specification