Fixed Income Market Commentary by Kevin Giddis

September 19, 2017

The Treasury market is trading slightly higher this morning as traders pare a few positions in front of today and tomorrow’s FOMC meeting. While it may be fairly predictable that the Fed won’t raise rates this meeting, it isn’t so predictable that they will provide the market with a lot of detail as it pertains to the reductions of its balance sheet. The expectation is for an announcement, likely a plan to slowly let maturing bonds roll off, then raise that to sales over time. The devil is in the details, and market watchers will be looking for those details tomorrow afternoon. Whether the Fed raises one more time in 2017 largely depends on what the inflation data has to offer for the balance of the year. Most are expecting the inflation numbers to increase as the effects of Hurricane Harvey and Irma are felt at the pump and other places. It is unlikely that this is the beginning of an upward trend line, so to use the Fed’s own words against itself, the recent inflation “boost” is probably transitory. But all of this does have one thinking about the direction of bond yields and what are the real catalysts of change. For the most part, “fading the Fed” has been a good trade for not only the short end of the market, but the long end as well. Since the beginning of the year, the 10-year note has actually dropped 20 basis points while the Fed raised rates twice. The latest price data is suggesting that they are “done” for 2017, although the hurricanes could cloud that thinking. Real GDP is hovering around 2.0%, and the forward view all the way to 2019 doesn’t suggest that we are about to break out of that trend. The same goes for inflation as measured by the PCE Core, which is expected to stay at or below 2.0% for almost two years into the future. Now keep in mind that all of this could change if the Trump administration is able to muster up enough votes to pass tax reform and/or deregulation. While the bias is still leaning towards higher rates, the abundance of unsettled global events, fears and disappointments have created an odd sort of barbell approach to investing: being long stocks on one end (income), and being long bonds on the other (hedge against geo risk…et all). Strange days indeed!

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