Fixed Income Market Commentary by Kevin Giddis

February 16, 2018

The Treasury market is trading higher this morning, yes higher, as investors look for some bargains and traders cover a few shorts before the long weekend. The modern version of the bond market seems to be one that plays a supporting role to other markets vs. a leading role in where the economy and inflation are going. What I mean by that is it seems for stocks to recover, bonds must “settle down.” That seems funny to me since there was no shortage of predictions that the bond market was overpriced, propped up only by central bank buying, which took yields to unsustainable low levels. Yet, in absence of inflation, money continued to flow into Treasuries in record numbers, even after the Fed stopped buying. Especially when you compared the Treasury yield against the debt of other sovereign countries. Now in what appears to be the beginning or maybe just a short run of inflationary pressure, the pundits are saying that if the Treasury market moves higher too quickly, it will be disastrous for stocks! Could we be looking at the wrong overpriced market? Bonds, primarily Treasuries, are doing exactly what you expected them to do. Trade to a yield, based on supply, demand and other comparables in the market place. On the short-end of the market, this is usually dictated by how the Fed feels about economic growth and job creation. On the long-end of the market, it is usually dictated by how the Fed feels about inflation and fiscal policy. As inflation expectations and reality rise, so will yields, but why isn’t anyone concerned about fiscal policy? That is where, in my opinion, the forward risk lies. I know, I know, increased borrowing has been around for a while and neither the economy, the potential for overcrowding, or inflationary pressures have been because of the Treasury being in the market. But not all markets are the same and neither are the trigger points. But, we haven’t had a period of time in which the Fed is unwinding its balance sheet at the same time the Treasury is ramping up its borrowing WHILE you are funding a tax cut! When you add to that the progression of higher wages and prices, you have a serious recipe for some pretty wild moves. I am not saying it is going to happen, I am just saying don’t blame it on the bond market. If inflation is truly present, bond prices in all shapes and colors will fall.

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