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Fixed Income Market Commentary by Kevin Giddis

February 22, 2019

The Treasury market is trading higher this morning as investors look to add to their safe haven trades, trying to protect from both the “quiet” and the “noise.” The “quiet” is the lack of volatility, while the “noise” is anything that comes out of Washington about a potential trade deal with China. While the FOMC Minutes are in the rearview mirror, the market will be paying close attention to a number of Fed speakers slated to speak today. Atlanta Fed President Bostic spoke about events away from the U.S. economy like global growth and Brexit, but he also mentioned that “monetary policy is near the end of an entire arc.” Later this morning, New York Fed President Williams will discuss inflation, St. Louis Fed President Bullard will address the Balance Sheet, and the same goes for Philadelphia Fed President Harker, who is speaking on the same topic this afternoon. Lastly, Vice-Chairman Quarles will be giving his own thoughts on, you guessed it…the Fed’s balance sheet as well. While the Fed’s balance sheet is currently in vogue, there really isn’t much to gain from it when trying to figure out whether rates are going higher or lower. What the Fed typically does with its balance sheet has more to do with determining what reserves it must maintain, either in currency or in excess. Whether it is $3.7, $3.6, or $3.2 trillion isn’t likely going to matter to the 10-year note, or whether they will raise rates in 2019, it just means that’s the number that they need to keep the banking system flowing and liquidity intact. Away from those speeches, there isn’t much more for the bond market to focus on. As I mentioned above, volatility has come to a standstill. The MOVE (Merrill Lynch Option Volatility Estimate) Index currently stands at 46.545, down from 54.18 a month ago. It has falling steadily as traders don’t have enough of a directional bias to try to drive prices too far away from its range. Maybe that comes from the data next week, or maybe that comes from a trade deal, but it isn’t likely to change before you go home today!

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