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September 2019
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National Non-Operating Observations
Global recession fears contributed to drastic drops in U.S. Treasuries and further yield-curve inversion in August. The benchmark 30-year Treasury bond sank to an all-time low of 1.907 percent at the end of August, below yields on U.S. debt of far shorter duration, such as 1-month and 3-month Treasury bills (T-bills). Additionally, the 10-year Treasury note yield fell further below that of the 2-year note. One of the Federal Reserve’s preferred inversion metrics—the spread between the 3-month T-bill and 10-year bond—dropped to -54.5 bps, its lowest reading since before the financial crisis.
Compounding woes, the U.S. manufacturing sector contracted in August for the first time in three years. The Institute for Supply Management (ISM) Manufacturing Index declined to 49.1 percent, with any reading below 50 percent signaling a contraction. The negative report contributed to recession fears, as escalated trade tensions continue to take a significant bite from the manufacturing sector. The August contraction saw the end to a 35-month expansion period, during which time the ISM Purchasing Managers Index averaged 56.5 percent. Additional data showed output and order book indices both at levels amongst the lowest seen for a decade, indicating that manufacturing continues to act as a drag on the economy, with Q2 Gross Domestic Product having been revised down from 2.1 percent to 2.0 percent.
However, the U.S. labor market continued to shrug off economic headwinds in August, with nonfarm payrolls adding 130,000 jobs. The unemployment rate has held steady at 3.7 percent for the past three months, following a slight increase from the 49-year low of 3.6 percent set in May. Labor numbers continue to defy expectations of economic weakening amid ongoing trade battles and declining manufacturing and construction activity indicators.
†2Q 2019 U.S. Bureau of Economic Analysis “Second” Estimate
*60/40 Asset Allocation assumes 30% S&P 500, 20% MSCI World, 10% MSCI EM, 40% Barclays Agg.
Notes: (1) reflective of most up-to-date data available; excludes food and energy sectors

August 2019
Month Over Month Change
Year Over Year Change

GDP Growth
Unemployment Rate
(10 bps)
Personal Consumption Expenditures, Y-o-Y(1)
(36 bps)
(14 bps)
(2 bps)
30yr MMD
(40 bps)
(117 bps)
30yr Treasury
(56 bps)
(106 bps)
60/40 Asset Allocation*
Non-Operating Assets
August was a weak month for investment assets, with a blended 60/40 Asset Allocation decreasing 0.46 percent. Equities were down across the board with the S&P 500 decreasing 1.81 percent and MSCI World and Emerging Markets indices down 2.24 percent and 5.08 percent, respectively. Continued outflows from equities and a flight to safety contributed to a 2.59 percent increase in the Barclays Aggregate Index, the largest monthly increase since 2008.
Internationally, lingering trade-war tensions continue to slow growth. The U.S. levied tariffs on an additional $112 billion of Chinese imports in August, while China imposed retaliatory tariffs on $75 billion of U.S. goods. However, despite continued uncertainty, the blended 60/40 Asset Allocation is now up 11.73 percent since the start of the year, and remains near its highest level in more than a decade.
Long Term
Last Twelve Months
Long Term
Last Twelve Months
Non-Operating Liabilities
The 30-year MMD and 30-year Treasury rates dropped drastically in August. 30-year MMD ended the month at 1.84 percent, down 40 bps month over month, while 30-year Treasury yields decreased 56 bps, ending the month at 1.96 percent. In the short-term markets, 1M LIBOR finished August at 2.09 percent, down 41 bps since the beginning of 2019. After plummeting 50 bps in July, the tax-exempt short-term benchmark SIFMA ended the month at 1.35 percent, down 5 bps month over month and 36 bps on the year. Municipal funds continue to see strong inflows amid increasing tax-exempt bond supply, due to historically low rates. Positive sentiment from investors caused $7.51 billion to enter muni funds in August, with $67.4 billion entering the market since the start of 2019. There have been 34 consecutive weeks of muni fund inflows, with investors taking a “risk off” approach due to volatility in the stock market—as evidenced by the $149.4 billion of domestic equity fund outflows since the start of the year.
Long Term
Last Twelve Months
Long Term
Last Twelve Months
Note: Taxable and tax-exempt debt capital markets, as approximated here by the ‘30-yr U.S. Treasury’ and ‘30-yr MMD Index,’ are dependent upon macroeconomic conditions, including inflation expectations, GDP growth, and investment opportunities elsewhere in the market. A key measure to track is bond fund flows, particularly in the more supply- and demand-sensitive tax-exempt market. Fund flows are monies moving into bond funds from new investment and principal and interest payments on existing and maturing holdings. Strong fund flows generally signal that investors have more cash to put to work, a boon to the demand. Fund inflows generally are moderate and consistent over time. Fund outflows typically are large and sudden, as external events affect investor sentiment, resulting in quick position liquidation which can drive yields up considerably in a short amount of time.
National Observations
National Observations
©2019 Kaufman, Hall & Associates, LLC
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