Fixed Income Market Commentary by Kevin Giddis

September 19, 2018

The Treasury market is trading slightly lower, but trying to find a bid this morning as the mixed bag of housing data is pushing yields back down. My suspicion is that the price action is more about short-covering vs. new buying, but these days, you never know. Housing Starts for August rose 9.2%, but Building Permits fell 5.7% during the same period. Building Permits could be viewed as a leading indicator, which is likely why traders were better buyers than sellers, especially when the 10-year reaches a 3.06% yield. We did see this in May, which was followed by a surge in global investment in the long end of the Treasury market that didn’t stop until 10’s traded back down to a 2.85% yield two weeks later. I am not saying that is going to happen now, but as the data is released, you might see traders try to reverse the downside move and book profits. This is where it gets tougher. The bond market is looking at things that quite frankly, aren’t likely to move the needle in either direction, especially in the near-term. Things like a trade war, the dollar, and the ups and downs of most of the monthly economic data, won’t really move the Treasury market. Next week’s Fed meeting may, but it will likely come from what the FOMC “says,” not what it “does.” There is almost a 100% chance of a rate hike next week, and a growing chance of one in December, and it is likely all predicated on one thing: inflation. Its presence or lack of presence is likely the most important metric for rates between now and the end of the year. If the next Core PCE number rises by more than 0.2% or the next Average Hourly Earnings number comes in higher than 0.3%, a trend change could be occurring that could take the 10-year to 3.25% in pretty quick order. If either of these metrics falls back in line, then we will likely settle back into the seat that pushes the 10-year back below 3% and drops volatility back to once again, a near slumber level of movement. Speaking of volatility, the MOVE (Merrill Lynch Option Volatility Estimate) Index hasn’t been above 50 since the last day of August, and is currently trading well below its average, so imagining worse might be hard to comprehend. Yes, it’s been that kind of year!

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