Fixed Income Market Commentary by Kevin Giddis

April 24, 2017

The Treasury market is trading lower this morning, as, of all things, the French election proved to be a catalyst for calm. The advance of the Centrist candidate Emmanuel Macron and Far-Right Candidate Marine LePen seemed to be all that was needed to push buyers away from the risk-off trade, leaving behind a number of “real-life” events and fundamentals in its wake. So far this morning, we have seen the 10-year note yield increase 6 basis points to 2.30% and the Futures market for equities in the U.S. soar. The rally was already on in Europe so the follow-through was mostly expected. It wasn’t so much that this was a surprise, these were the candidates that were supposed to move on, so this is more of a case of relief that the unexpected didn’t happen…if that makes sense. Anyway, I don’t know how long the markets will be in this state of European euphoria, but we are looking for a lot to happen this week, from a number of sources. The economic calendar is pretty full with the release of New Home Sales, Durable Goods Orders, 1st Quarter GDP, and the University of Michigan’s Consumer Sentiment Index. The Treasury will also be busy with the sale of $88.0 billion of 2-year, 5-year, and 7-year notes. But probably the biggest news will come on Wednesday…we hope. That is when the President promised to release his tax plan, in some form, for all to see. The market will judge this as either a real possibility or just a “broad form” idea that candidates use to bring attention to themselves vs. a real framework for law change. Oh yeah, I almost forgot, the U.S. will runout of money at the end of the week if the debt ceiling isn’t raised. All this plus my birthday is on Wednesday. So when I say it is a big week, I am not making it up. Whether it is the French election, the musings of Washington or the future of the U.S. economy, look for volatility to increase and trading to be brisk. We wouldn’t have it any other way!

April 20, 2017

The Treasury market is trading lower this morning as the beat goes on, assets shifting back and forth between Treasuries and equities. After dropping to about 2.16%, the 10-year note has drifted upward to 2.23%, but it is mostly about consolidation vs. a fundamental change in the current way of thinking. Bonds, Treasuries in particular, have benefited from a safe haven bid, plus a dose of economic reality and a dash of delayed “hopes and dreams” in Washington. Stop me if you have heard this before. Jobless Claims for the week ending April 15th rose by 10,000 to 244,000. Still a very nice number. The Philadelphia Fed Business Outlook Index fell to 22.0 in April vs. 32.8 in March. Yawn. Today’s market in the fixed income space is likely more about “what are stocks going to do?” vs. “what is going to derail the bond market rally?” Fed Governor Jerome Powell is speaking now at the Global Finance Forum and offered that he supports “higher thresholds needed to reduce regulatory burden on smaller firms.” He also believes we are at “full employment.” Next up is tomorrow’s speech by Minneapolis Fed President Neel Kashkari who voted not to tighten at the last meeting. My guess is he still feels that way. Moving along, the Treasury will sell $16.0 billion of 5-year Treasury Inflation Protected Securities (TIPS) today. As with a number of past TIPS auctions, if you are buying these securities, you continue to do so “on the come” vs. the reality that a significant inflationary move may not be quite reachable in the near term. There are still a number of unsettled issues that the bond and stock markets must deal with. In no particular order there is the dollar, the economy, North Korea, China, Iran, the potential for a government shutdown, two big elections across the pond, earnings releases, and the unpredictable White House. All of which could affect trading. “Stay thirsty my friend.”

April 19, 2017

The Treasury market is trading lower this morning as the 10-day move towards lower rates looks to be taking a break. The 10-year note yield has dropped roughly 20 basis points during this period as investors begin to question the “reflation” trade. Quietly, though, there is another movement on foot: a tremendous short squeeze in the Treasury market. We all know now that there was a bit of a “Clash of the Titans” between the Portfolio Managers who are in the market nearly every day, holding positions of Treasuries for long periods of time. On the other side, appears to be the “Hedgies,” who bet heavily on rates moving higher. The basis for taking that position was a combination of a growing economy, higher inflation, and loads of pro-growth initiatives coming out of Washington. As we also know by now…that hasn’t really happened. While we don’t know how long this imbalance of euphoria will be silent, we do know that if the Fed continues along a tightening path and the U.S. economy continues to follow a “Jekyll and Hyde,” one step forward, one step back pattern, the yield curve will flatten. Using that same 10-day period I mentioned above, the spread between the 2-year and the 10-year note has drawn in some 10 basis points to an even 100 basis points. The last time we were this tight was the day of the election. So you are probably thinking, “Where does it go from here?” If the geopolitical risk declines or weakens, if the economic numbers normalize, and if something…anything gets done in our nation’s capital, then it would be safe for the euphoria to come back out of the caves they currently reside in, boldly predicting higher rates. But, if the Atlanta Fed’s GDP prediction for the first quarter (0.5%) is validated, or any of the things that I offer that needs to happen, doesn’t, then rates are likely to drift lower, potentially testing 2.0% again on the 10-year note. The Fed releases the Beige Book today. Enjoy the excitement.

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