Good morning and welcome to BVTV. August has been a month of two halves and this past week again has been quite a quiet one. So much so that attention turned back to the shape of the US yield curve. It's a sign of how quiet things have been that we haven't heard much about the recent flattening. We're still on a flattening path, but by no measure is it yet inverted. So we continue to just take guidance from the strength of the US data. Several Fed members have said that they wouldn't be making votes that would intentionally flatten the curve any further. The main point of interest last week was around volatility. In the ten year Treasury quarterly volatility has been so low that it's broken a record that stood since the 60s. This is certainly interesting in isolation, but the bigger question is why is this happening? There are, of course, many theories out there, and there's also a good deal of speculation. For me, it can't just be down to the summer lull. We've had summers every year since the record breaking period back in the 60s, although most of them weren't this hot. There appear to be two opposing forces at work. The well-documented excess supply and fewer buyers, plus the Fed on their path of tightening and the strength of the US data all promotes fears of overheating. These provide an argument for higher bond yields. Contrary to this, there are also forces keeping yields lower. The threat of trade war has created a flight to quality into the US Treasury market. We don't know what the conflicts between China and the US will end up like. And indeed this week we may also see some additional potential tariffs imposed. Also higher risk free yields in the US have encouraged investors into the US market. Even a UK investor now can pick up about 125 basis points on a hedged basis for investing in US Treasuries. With Brexit and so much around that's still unknown, the US arguably offers a safer risk free than the UK market gives. It currently yields 1.4%. But that was only on a recent spike. It spent most of the last quarter around the 1.3 level. Thinking back to February, the ten year breach, that magic 3% level. Many expected a large sell off from here. A high of 3.11 was soon dampened as yields quickly retreated back to the high 2.8. And that's a level it stayed at. The 3% level appears to have become rather behavioral and activity seems to be fairly dependent on it. Meanwhile, the market's tried to try to decipher the actual terminal rate despite all of this political noise. So what do the opposing forces mean to the US dollar? If we ignore those countries that are being driven by idiosyncratic stories such as Russia, Turkey, Argentina, South Africa, the US dollar had been fairly weak through most of 2017 and into 18, despite the Fed's continued tightening. This is all good for US trade and also for the S&P, and that seems to be Trump's key barometer of success. As the trade war speculation started to hit the headlines, the US dollar started to strengthen and at the expense of most emerging market currencies and other countries with political uncertainty, countries like the UK. Trump has strengthened the currency on occasion by just tweeting. Nothing was actually done. Fast forward six months and now we're in a place where various tariffs have been put on China, sanctions have been imposed on Russia and there are problems growing between Turkey and the US. I find it interesting that these states have become the target of Trump's trade wars, whilst other nations that were targeted initially have come away better off after negotiations. Think about Brazil, Mexico, Argentina and actually even Europe. They're really good examples and potentially Canada might follow this. So Trump, the protectionist and Trump the populist, has actually created a more open, a more favourable path of global trade. Exactly the opposite of what he's been conveying in the media. So further globalization with better terms is likely to keep global inflation lower and the US closer to target. He then made comments against the path of Fed tightening, thus creating more flight to quality into the Treasury markets once again constraining yields. So low volatility in the Treasury market might be the result of opposing forces. But one thing is for sure this summer's been dominated by political noise and not by changes in market fundamentals, at least in the developed world. This is certainly one to watch as we move into September. It's a relatively quiet week this week for data. Most interesting thing coming from the euro and UK PMIs in the first part of the week. On Friday, US employment data is published. All eyes will be focused on whether job growth has bounced after the Toys R Us bankruptcy seemed to impact those July numbers. So thanks for watching and have a great week.