Fixed Income Market Commentary by Kevin Giddis

July 20, 2017

The Treasury market is trading higher this morning as the ECB’s language appears to be a bit different than what Mario Draghi said a couple of weeks ago. The ECB stayed the course with its interest rate policy, and it even sounded a bit like our own Federal Reserve, suggesting that they have “confidence that inflation will gradually head to levels in line with our inflation aim.”  It was almost like if you closed your eyes, you could hear Janet Yellen speaking! It reminded me of the phrase, “wishing in one hand, and hoping in another.” The bond market knows how to read through this and took this morning’s announcement as dovish, and as a result, started buying the long end of the curve, driving the 10-year note below 2.25%. Where we go from here is still a bit of a mystery considering that the volatility remains a challenge, and very little is being accomplished in Washington D.C. other than pushing the can down the road. Jobless Claims for the week ending July 15th fell by 14,000 to 233,000, indicating once again that we don’t have a job creation problem, but a job wages problem. The Philadelphia Fed Survey came in lower than expected for the month of July, falling to 19.5 from 27.6 in June. The Leading Index for June rose by 0.6% vs. up 0.3% in May. The Treasury will auction $13.0 billion of 10-year TIPS (Treasury Inflation Protected Securities) today, which will probably go well, but not so much as a current inflation play, more like one that is “just around the corner.” In absence of any constructive work on President Trump’s pro-growth initiatives, the market volatility should remain low. Next week is the FOMC meeting, and little is expected to occur that would change trader’s minds about when the Fed might tighten again, but we may get an idea when the Fed will look to do something with its balance sheet. That doesn’t leave us with much to go on other than a handful of economic numbers, and some hope that we might see tax reform and changes in the regulatory environment before the end of the year. As a result, I will likely have the time to begin my holiday shopping…today!

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