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Fixed Income Market Commentary by Kevin Giddis

July 20, 2018

The Treasury market is trading lower this morning as investors are making a few trades to take the risk-off position before the weekend. While there has been a lot of information extended to the bond market this week, very little of it caused yields on the long-end of the curve to make a move in either direction. We opened the week with the 10-year note yielding 2.85%, and we are currently spotting the 10-year at…you guessed it, 2.85%. The 2-year followed a similar pattern, but you could make a case for a 1 basis point move if you rounded up or down. There was some play in those spreads. We saw the 2-year/10-year note spread tighten to 24 basis points, trade as wide as 31 basis points, only to end up at its current 26 basis points. Most of the news came from the Fed, specifically the testimony by the Fed Chair, Jerome Powell. While Powell didn’t alter his current stance much, he did pick up a critic along the way in the form of President Trump who doesn’t like the thought of the Fed raising rates. His comments were atypical of a U.S. President, but I think that the market has become accustomed to this, so there was very little movement from traders after this criticism, and I doubt the Fed Chair will address it. The Fed Funds futures Probability Index suggests that the Fed is on track to raise rates at their September 26th meeting, even though there is a meeting on August 1st. If they do indeed raise rates in September, there are only two meetings after that before the end of 2018, and I would venture to guess that unless the data, especially the wage inflation, surges, a September rate increase may be the last of the year. Quite frankly, for the FOMC to increase the Fed Funds rate in September, the data needs to shift to a more upward sloping inflationary track vs. what we are seeing now. This is something that the Fed expects and the Fed Chair clearly communicated that this week. So the takeaway as far as the market is concerned is that the curve is likely to continue to flatten, the data is likely to remain close to what we are seeing, and yields aren’t expected to move all that much until we break free from this low vol. noose that we are experiencing. I’ve seen better, and I have seen worse, but I am not sure I have seen this much apathy in a long time. Somebody needs to knock that battery off Robert Conrad’s shoulder and get this party started!

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