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Fixed Income Market Commentary by Kevin Giddis

February 21, 2018

The Treasury market is trading higher this morning as investors took a day to step away from the stock market, seeking the safety of bonds at the highest level. Even though the 2-year note auction wasn’t the “best ever,” profit-takers in the equity market moved cash into Treasuries that afternoon. Today may follow the same pattern, especially if the 5-year note auction goes well. Likely the biggest news in either market today will be the release of the FOMC Minutes. This is where we will get a better view of how the Fed feels about inflation, which could alter the way the market trades if they believe the FOMC is behind the curve. Almost all of the market participants, bond and stock, are concerned about inflation and interest rates. Just a few months ago, only the bond market was concerned about whether inflation was going to make an appearance. Here’s the tricky part: how long will inflation hang around the party? We tend to be really focused, as we should be, on inflation in the front part of the year only to see it fade by summertime. Is this one of those times or is this just the beginning of a prolonged period of rising wages and consumer prices? Up to now, the Fed hasn’t been all that worried about runaway inflation, but the Minutes could either confirm this or not. If it does, then look for the Fed to be more aggressive in dealing with inflation via increases in the Fed Funds rate. If not, then look for the markets to go back to the fundamentals, with the expectation that the Fed will raise rates in March, then wait until later in the year to raise rates again. Here are the things you need to be watching. 1) The dollar 2) The Fed 3) Foreign interest in Treasuries per each auction 4) The budget deficit and the Treasury’s financing requirements 5) Economic data and 6) Anything to do with inflation. Today the Treasury sells $35 billion of 5-year notes and $29 billion of 7-year notes tomorrow. Each is $1 billion more than last month. The next good view on inflation is not until the end of the month when the PCE Core will be released. In the meantime, watch for cracks in economic growth. Not 4th quarter growth, but the first months of the new year growth. If the economy is slowing and the Fed isn’t concerned about inflationary growth, buying the 10-year anywhere close to 3% could be a great buy!

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