Fixed Income Market Commentary

Fixed Income

Fixed Income Market Commentary

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

January 23, 2018

The Treasury market is trading higher this morning as traders continued to cover their shorts and investors found new reasons to buy, especially after the Bank of Japan suggested that they will continue to “let the money flow” a while longer. The BOJ also remained committed to its 2% inflation target, just like the Fed in this country. Next up is the ECB on Thursday, and the market will be looking for a bit more aggressive tone from them as Europe begins to recover at a faster pace than last year. While it is very likely that the ECB will continue to ease, traders will be looking for more transparency and elevated communication that the punch bowl is closer to it’s bottom than it’s top. The dovish tone by the Bank of Japan helped to turn a recent downward trend in bond prices, but I wouldn’t get too excited about a push towards lower Treasury rates any time soon. The reasons being that the U.S. economy is on a solid path of growth, should get a boost from tax reform, and higher wages are likely going to makes its way into the numbers by the second half of 2018. As far as the Fed goes, Yellen’s last meeting is January 31st, and while there is only a scant chance of a rate hike, investors will be looking at the change of the guard from Yellen to Powell with the expectation that the FOMC will raise rates at their next meeting on March 21st. With the shutdown now behind us, at least until early February, the market will focus on the “next” bond sale by the Treasury. Today we will get $26 billion of 2-year notes, followed by $34 billion 5-year notes tomorrow, and $28 billion 7-year notes on Thursday. I expect each of those auctions to go well, and demand for U.S. government securities to remain strong. While I believe that the bull market for Treasuries may have ended, I don’t really believe that we are in a bear market either, no matter what so many may have predicted. Just like bull markets, bear markets are irrational, pessimistic, and sustained. We may see higher rates before we see lower rates, but it won’t become irrational until the mighty beast called “inflation” makes its appearance. In simpler terms, until the Core PCE reaches 2%, inflation is more of something to speculate about, not to set your action plan around just yet. That is the main challenge for the Fed, which is under new management and yet to change its policy towards what is the measurement of inflation. I am not saying that it isn’t coming, just that pre-selling long end fixed income expecting this to occur may, for the 5th time in 5 years, be a bit premature. 


The information contained herein is based on sources which we believe reliable but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities herein mentioned. This firm and/or its affiliates and/or individual shareholders and/or members of their families may have a position in the securities mentioned and may make purchases and/or sales of these securities from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Raymond James may also perform or seek to perform investment banking for entities referred to herein.



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