Fixed Income Market Commentary by Kevin Giddis

May 24, 2018

The Treasury market is trading almost without movement, but that doesn’t mean that nothing has happened. While the Fed was the big news yesterday, today traders must put into action what they think the tea leaves are suggesting. It’s not like the Minutes were all that earth shattering, but if you looked closely, you may have seen a bit of the hawkish tone get adjusted. This nuance of adjusting the rate paid on excess reserves upward by 20 basis points vs. 25 basis points to maintain its Fed Funds spread at .25% may happen on June 13th, but it won’t likely have any impact on whether the FOMC will raise rates, even though the Fed Funds Probability Index fell a bit. If they actually do what they are suggesting, I do feel that the FOMC will raise rates a total of three times, not four. They suggested that, in only the way that the Fed could, the phrase that their “systemic inflation objective” could travel beyond 2%. Regardless of what they say publicly, they don’t want to see the yield curve invert, and they don’t want to be the cause of a recession. What all of this means to the bond market is that the Fed may have blinked…a bit. The push back to 3% was pretty swift yesterday, but it happened before the Fed Minutes, and had more to do with trade, the dollar, and geo issues, all of which suggested that the world is a less than settled place. These items may take on more meaning as time goes on, but the combination of them could keep the lid on long-term rates for a while. Today the Treasury will auction the last leg of the refunding stool with the sale of $30 billion of 7-year notes on the heels of a really good 5-year note auction. It should go well because it is widely considered the most “investable” part of the yield curve. The spread between the 7-year and the 10-year is…wait for it, 5 basis points! Existing Home Sales for April will likely fall a bit, and higher rates are starting to take a toll, so weaker numbers may be on the horizon. All in all, a pretty good week for debt.

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