Fixed Income Market Commentary by Kevin Giddis

February 23, 2018

The Treasury market is trading higher this morning as investors are beginning to find value in bonds again…and why shouldn’t they? The Treasury market endured almost $260 billion of issuance with little fanfare, got support from the Fed on the inflation front, and actually acted to calm the other markets in the process. I can’t tell you if this is a fundamental change of investor sentiment or a return of sanity, but we tend to want to look at the current trading landscape a day at a time. The FOMC minutes seemed to put the Fed’s view into perspective and with every Fed speech, this is being reinforced. Concern about inflation, yes. Concern about runaway inflation and growth, not likely. Speeches by William Dudley and John Williams could move the market today because they are speaking on the very subject that traders are anxious to hear about: the U.S. economy and monetary policy. Next week the Fed Chair testifies before Congress about where we are and where we are likely headed…at least from the Fed’s perspective. You don’t have to be a “bond bull” to like the bond market where it is today. Oversold opportunities are available in all markets and I think that the fear trade has exceeded its value, especially as we approach 3% on the 10-year note. Inflation fears will either be confirmed or they won’t over the next few weeks, but some bullish things happened for bonds this week and I am not sure many folks even noticed. Before you even challenge 3% on 10’s, you need to pass through a pretty big resistance level at 2.95%. We touched that level on Wednesday, and then turned sharply back down. If you breach 2.95%, then the technicals will tell you that 3% is a forgone conclusion. If you breach 3.05% and 3.10%, you have, from a technical perspective, likely reached bear territory on the long-end of the Treasury market. Today’s price action is a positive move, which is why the equity market has a more positive tone so far today. Things to keep watching: Corporate spreads remain tight, so the market for spread product doesn’t seem to be worried about inflation…at this time. The Fed seems to think that they are in a good position as well, using words like “further gradual increases,” when describing monetary policy. Lastly U.S. Treasuries, when compared to German (0.67%), U.K. (1.52%) and even Spanish (1.58%) 10-year debt, still makes sense to me.

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