Fixed Income Market Commentary by Kevin Giddis

March 24, 2017

The Treasury market is trading to a pretty quiet bid ahead of the House vote on Health Care reform. It is just one of the many stories surrounding the markets these days, but certainly not the last. The bond market is poised to do a number of things, some of them to the great surprise of many experts who believed that all things were possible, perhaps even probable, and interest rates were about to soar to the moon! Turns out Washington is a fascinating place with many different ideas than those at Disney and real life differs greatly from politics. This vote is important and if it fails, it could set the stage for some volatile market times since so much of the happiness in the equity market was based on a number of initiatives becoming new laws. What does this mean for the bond market? 1) Interest rates aren’t likely headed skyward…at least for now. 2) If the equity market can’t just shake this off and keep going, a flight to quality bid is likely going to occur. 3) The Fed will be able to take their sweet time raising rates. The economic numbers continue to come in solidly in the moderate category and today’s was no exception. Durable Goods Orders in February rose 1.7% as a headline number and were up 0.4% when you removed the volatile Transportation orders. Again, not great but not terrible either. In my opinion, the key to what happens today centers around who gets the blame should this fail. Is this on the Trump administration or Congress? Could this be a precursor to future legislative failures? Will the market see this as a problem for what’s ahead or simply suggest the initiatives are “out of order” and that all would be better served if we moved on to tax reform or easing the regulatory burden on the banks and other corporate entities. However this goes, it is probably the first of many shots across the bow for the President. It could also be the very reason why investors need to maintain a consistent allocation of fixed income securities. It isn’t because of the returns, it is because the perceived “certainty” meter is beginning to look less reliable than it did a month ago, which is likely to keep rates from shooting to the moon anytime soon.

March 21, 2017

The Treasury market is trading lower this morning as traders appear to be assessing the next move in the bond market. It has been a whirlwind week, and adjustments are being made as to how much of an effect the Fed is going to have on interest rates over the next few months. The market had gotten ahead of itself with the expectation that the Fed had 4 or more rate hikes in them in 2017, and drove yields to a level that met that expectation. Then the FOMC acted, spoke, and indicated that 2 or maybe 3 would be the max change in policy. What we saw was not only a short-covering rally, but “real” buying out the curve as well. The economy may not be exploding, but it continues to grow. Inflation, the Achilles heel for longer-dated bond investors, may not follow a normal “up” cycle, and may even fall in the near term. That action has tended to put the Fed near the back of the line as an immediate concern. Fed Funds futures are predicting the FOMC will not raise rates again until mid-June. The bond market now turns its attention to Washington, where there is no shortage of potentially market moving news. If you remember, a lot of this move in rates was predicated on the new administration being successful with a number of its pro-growth initiatives. I believe that President Trump is learning a little more about the way Washington works than he ever expected, which is delaying the possibility of pushing this agenda through in this calendar year. Long “sell-cycles,” and hotly-contested duels between the Republicans and Democrats push out further the idea that the majority can simply wave a wand, and “huge” things suddenly get done. One thing we do know is that the data still matters, and numbers like Existing Home Sales, New Home Sales, Durable Goods Orders, and Mortgage Applications are going to be watched by investors. Unless we see a surprise or some geo risk on the horizon, the “range” is likely going to remain intact.

March 16, 2017

The Treasury market is trading lower this morning, which is not expected after yesterday’s post-Fed rally. Call it short covering, call it an epiphany, call it whatever you wish, but what we saw was a market that was prepared for the worst, and got the best. There was little doubt that the Fed was going to raise rates yesterday; even I came around to that thinking. What was surprising was the language in the text and the language used by the Fed Chair that indicated that the FOMC wasn’t so concerned about growth or inflation to the point that they needed to alter their “gradual” approach to removing stimulus from the mix. For those who invest in bonds and stocks, this was the best possible news! Rejoice! Instead, folks want to bash the Fed, say they are behind the curve, and still call for much higher interest rates. Face it, you missed it. What I believe we witnessed yesterday was a Fed that is in control and asserted its message in alignment with the best interests of the markets and the U.S. economy…even if it happened by accident. Today we are back looking at the fundamentals and they aren’t exactly showing an economy that is running awash in growth. Housing Starts in February, a sign of current activity, rose 3.0% after falling 1.9% in January. Building Permits, a sign of future activity, fell 6.2% in February after rising 5.3% during the prior month. Jobless Claims for the week ending March 11th fell 2,000 to 241,000. All of these indicate that the U.S. economy is ebbing and flowing, but not posing any dangers for the Fed. There are now about 50 days until the next FOMC meeting, so we must occupy our time by looking at the data and to Washington for the next clues as to where interest rates are heading. If Washington ever gets its act together, every forecast should be looked through a different prism. So if you do really believe that is a possibility, I have a perfect bracket for sale. I believe that yesterday’s Fed actions accurately, and realistically depict where we are. Moderately growing with limited inflation, while keeping an eye on many potential geopolitical risks that could stand in the way of higher rates.

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