Fixed Income Market Commentary

Fixed Income

Fixed Income Market Commentary

Read the fixed income commentary from Executive Vice President Kevin Giddis.

August 20, 2018

The Treasury market is trading higher this morning as the continued strength of the dollar is bringing in the buyers, especially for U.S. government debt. I know this flies in the face of so many other thoughts of where rates should be, but believe it because it is happening, and happening on a grand scale! The spread between the 2-year and the 10-year is now 24 basis points, but I am not sure you should read much into that just yet. The U.S. economy remains on solid footing, although there were a few indicators last week that are worth paying attention to as we progress down the growth path, but the basic economic structure is sound. That will likely keep the Fed in a tightening mode, but this is where it gets tricky. The Fed is trying to balance the action of removing accommodation, without reaching a too restrictive posture in the process. Raising rates too far too soon could hurt economic growth, especially if the tariffs turn out to not be inflationary. Much has been said about a massive short positon in Treasuries vs. a growing long position in the dollar. This is a storm in which there likely can only be one winner, and most of the money is on a short squeeze. I mention this because it may play out over the next week or so when the Treasury comes to market with yet another refunding. We will find out just how many bonds the Treasury plans to sell this Thursday. If the dollar remains strong, and the trade issues don’t subside, then the squeeze will likely fall on the Treasuries shorts vs. the dollar longs, especially if demand for the auctions remains as strong as it has been in recent times. It could make for some interesting volatility and gaps in market activity that we haven’t seen in quite some time. The economic calendar for this week is somewhat subdued with New Home Sales on Thursday and Durable Goods Orders on Friday taking center stage on what could be described as a sleepy week. Our only hope for enhanced vol. could come from tomorrow’s release of the FOMC meeting minutes or the Fed meetings at Jackson Hole, but I wouldn’t put a lot of stock in those meetings, since we pretty much know what the Fed wants to do. While the bid for Treasuries is likely to remain as strong as the strength of the dollar, one still needs to pay close attention to the fundamentals, and they aren’t quite ready to predict a recession just yet. 


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