Fixed Income Market Commentary by Kevin Giddis

February 21, 2019

The Treasury market is trading lower this morning as traders weigh the chances of a trade deal with China that has enough “teeth” to sway investors current thought pattern. The thought pattern I am referring to is the one that is predicated on inflation remaining very much in check, U.S. economic growth not accelerating from here, and the Fed remaining on the sidelines. Notice that I didn’t mention a trade deal, mainly because we are not sure that a “deal” may be a deal after all, but just another can-kicking with another deadline. Yesterday’s FOMC Minutes read pretty much as the market expected them to read. They cited Europe, trade, Brexit, and the government shutdown as the principle reasons why the Fed has decided to be “patient.” No real mention about concerns about the U.S. economy, and very little said about inflation, unless it starts to move up from here. They likely still feel the same way because Europe and Brexit have gotten weaker since the last day of January, with only a slight increase in hope for a trade deal. So what should we be doing with our money? In bond land, you want to remain in high quality bonds, maybe extending your maturities a bit to take advantage of the higher yields, using short duration corporates and longer dated municipals as the vehicles of choice. We have a lot of data coming out today, but very little of it is either current or important, with maybe an exception for the release of Existing Home Sales which are expected to be up 0.2% for the month of January. Until something big happens, we continue to believe that we are in a low vol trading range pattern that likely takes the 10-year note to a 2.75% on the high side and a 2.60% to the low side. The high side could be reached if we get a substantive trade deal with China, and the low side could be achieved if the trade deal collapses or if the economic data in the U.S. takes a turn for the worse. In the meantime we may have to be satisfied with the literal parade of Fed speeches (six different Fed officials) between now and Friday afternoon.

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