Fixed Income Market Commentary by Kevin Giddis

May 24, 2017

The Treasury market is trading higher this morning as investors fall back into the low volume, low volatility grind of low rates. It’s not like there is nothing going on, there are some pretty big things happening around the world right now, but the markets seem to be looking away from them. Terrorism, the release of the Budget proposal from the White House, a historic visit to the Middle East by the President, and the FOMC Minutes (released later today) should have been enough to drive volatility higher where we would see better price action than we have seen in the last three sessions. The spread between the 2-year and the 10-year is a very tight 96 basis points. The odd thing about that is it basically signals nothing when trying to predict the future of the markets. Besides the Minutes (2:00 pm Eastern time), the Treasury will be auctioning $34.0 billion of 5-year notes. Yesterday the sale of $26.0 billion 2-year notes at a yield of 1.316% attracted a lot of attention from all types of investors registering the highest bid-to-cover ratio (2.90x) since the May auction of last year. While there is not much to read into those results, it does suggest that there remains global interest in U.S. government debt, regardless of how dysfunctional we may seem. The Budget from the White House is a different story. Expect a lot of conversation around this one as the political divide will be in “full bloom” as this proposal progresses through Congress. If there is a signing, don’t look for it to be in the form that we saw yesterday. More to say about that later. The release of the FOMC Minutes could spark a few buyers and sellers to push rates higher or lower, but I wouldn’t count on it. What was happening then, along with the view of the Fed at that time, has changed. While Fed Funds futures is suggesting that there is a 100% chance that the Fed will go in June, I think the market is looking at this from a different lens. I will go out on a limb and say there are traders and investors who believe there is a “non-zero” chance that the Fed will hold pat next month. I offer that because the biggest shoe the FOMC needs to see drop is inflation, and it seems to be going the opposite way that the Fed needs it to go. On the flip side, they don’t need “perfection” to vote to raise rates, but I wouldn’t go as far as to say it is 100%. Existing Home Sales for April comes out today and we expect to see a slight decline (-1.0%) in sales, mostly because of higher rates and a lack of inventory. With an early close on Friday for the Memorial holiday, we are running out of trading hours before Wall Street heads for the Shore. I think what we are seeing now, sans an unexpected event, is a market that is looking forward to the break.

May 22, 2017

The Treasury market is trading slightly lower this morning as the risk-off trade fades a bit after equities improved towards the end of the week. Dow futures are pointing to a higher opening this morning and in absence of any “real events” happening over the weekend, it is expected that the momentum will continue. What this means for the Fed and interest rates is simply less clear than it was two weeks ago, but it doesn’t mean that they won’t go ahead and raise rates when they meet on June 14th. That is still three weeks away, so there is a lot that could happen between now and then, but it really comes down to a couple of important data points, mostly those focusing on inflation. This week there are only a few fundamental releases, plus an early close before the Memorial Day holiday on Monday, so look for the bond market to be more “reactive” to events other than what is right in front of them. What I mean is that it is doubtful that New Homes Sales (Tuesday), Q1 GDP (Thursday), Durable Goods Orders (Thursday) or the University of Michigan’s Consumer Sentiment Index (Friday) are going to raise the blood pressure of traders or cause a spike in volatility, but a couple of items could. They are 1) The release of the Budget by the White House and 2) The Minutes of the last FOMC meeting. Realizing that I am stretching it a bit here, the Budget release could give the market a better “peak” into what the administration may be thinking and the Minutes may offer some forward-thinking insight to what conditions might be present for the Fed to pause in June vs. raising rates. Away from those items, there are a number of Fed officials speaking this week staring with Minneapolis Fed President Neel Kashkari today and tomorrow, followed by Philadelphia Fed President Patrick Harker on Tuesday, plus an array of Fed speakers throughout the globe. My best guess is that the bond market is going to get its que from the stock market, so look for the rise or fall of rates to be predicated on how investors “feel” vs. the a frontal assault of fresh data…which tends to be preferred. That likely won’t happen until the following week.

May 19, 2017

The Treasury market is trading lower this morning as traders may be enjoying a bit of overnight “quiet” and using this time to rest after all of what has happened this week. Going from no volatility to full court vol tends to make even the best a bit weary. In some ways, it was more of a wakeup call for stocks than it was for bonds. Bond traders are rarely optimistic unless you count the world’s misery as optimism. For most of 2017, the bond market has been skeptical about how a businessman in the White House, flanked by businesspeople in his cabinet could possibly manage the deep-rooted politics of Washington. As it turns out, they can’t or at least not yet. Probably a good time to go out of the country as the president is doing now. The forward view after this week has become much tougher to gauge, and investors tend to react in those scenarios with great caution, which is why we have seen the 10-year note drop 10 basis points this week and the probability of a Fed rate increase drop considerably. All of these things will play out over the next 30 days, and there is a lot to learn about not only the goings on in Washington, but the fundamentals of the U.S. economy as well. The most recent data has suggested that economic growth is slowing a bit, and that inflationary pressures are receding. Even though there is a lot of data coming out next week, the market will likely continue to focus on the calendar. Each day we don’t get some movement on key issues like tax reform and deregulation, more and more uncertainty looms large against the backdrop of an economy that is slipping. In absence of some real clarity, I would expect the bond market to be watching the equity market closely today. If confidence begins to wane, then Treasuries are the likely recipient of the money. If the equity market rebounds, then those same monies that flooded into the safe haven trade will likely see a reversal. What won’t change is that the FOMC needs price pressures to increase at the same time as some progress in these pro-growth initiatives occurs. Without it, I would expect the Fed to be on hold when they meet in June. Have a nice weekend!

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