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Fixed Income Market Commentary by Kevin Giddis

October 19, 2018

The Treasury market is trading slightly lower this morning even while the wheels on the equity market seem to be wobbling. The story of fear seems to be in place right now as investors fear not only interest rates and the Fed, they are now fearing forward earnings. How these things snuck up on so many folks boggles my mind, but “markets will do what markets will do.” In the defense of the bond market, it seems to be taking it in stride. Since the major move up three weeks ago, we have actually seen trading stabilize out the curve, ironically with yields falling from their October 5th high of 3.23% to its current 3.18%. It appears that the equity market was surprised by the Fed’s rate comments, and continues to be surprised that interest rates are going up. While I do think this is overdone, I also think that the Fed may be overstating its fear of inflation, and what the response should be for the next few months or quarters. Over time I do believe that this will work itself out, but as far as equity valuations, whether this is a great buying opportunity or a better place to sell, I will leave that up to the experts. What I do know is that the bond market is somewhat oversold, but it may not find many buyers until more data is released, a geopolitical event gets our attention, or the Fed changes its view on forward monetary policy. Most of this will need to play itself out, and investors will likely need to make even harder decisions in the coming weeks. With the exception of the FOMC Minutes, most of the economic data this week came in weaker than expected, especially Retail Sales and Housing Starts. Geo risks like Italy and China continue to escalate and we have seen mild buying and a small flight to quality bid emerge. Last week, the inflation data was softer as well, but this is almost entirely viewed as a Fed story, and right now, they own most of the cards, to the President’s dismay. Until the Fed changes its view, the bond and stock markets are going to be more difficult to figure out. The U.S. economy is strong, the future for it still looks good, and wages are increasing. The unknown to the markets is whether wages will continue to rise, flatten out, or begin to fall. In my opinion, long rates are fairly balanced with short rates, and the curve remains slightly upward sloping (31 basis points). Inflation is in a controlled state, and the Fed has become more hawkish than any time in the last 10 years. As far as the fear in the equity market, if multiples are changing, then there is a good chance that the prices of those stocks will be changing as well, but the economic fundamentals remain constructive for growth. Go figure. Remember it IS October! Have a nice weekend.

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