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Fixed Income Market Commentary by Kevin Giddis

April 17, 2018

The Treasury market is trading slightly lower this morning as the market digests the latest economic data, takes in what all of the Fed speeches might mean, and attempts to read the “tea leaves” to determine where the next move in interest rates may be headed. Housing Starts for March rose 1.9% after falling 3.3% in February. Building Permits for the same period rose 2.5% vs. a 4.1% drop the previous month. It appears that, at least in March, the demand for homes outweighed the increase in rates to finance them. This tug-of-war is likely going to continue, especially if the Fed keeps raising rates, likely crowding out potential buyers in the process. For all of the market’s concern, China appears to still have an appetite for Treasuries, and has yet to use it as a bargaining chip in the current trade dispute. The Treasury International Capital (TIC) Foreign Demand report for the month of February suggested that foreign investors, China in particular, added billions to their current Treasury positions at a time when many thought they would be going the other way. Just add that to the mystery of the current markets, with bonds leading the “race to weird” by a long shot. I say that because in the face of what the Fed is predicating, the bond market is stubbornly “stuck in place,” almost a non-believer, especially when it comes to inflation. If China keeps buying vs. the expected selling of Treasuries, that will only add to the argument for the continued investment in the long end of the curve. At the same time, if the FOMC maintains its desire to push the short end higher, well you know what happens next, the curve will continue of flatten, possibly fulfilling the prophecy of a slowing economy. Later this morning we will get Industrial Production and Capacity Utilization for the month of March and each are expected to show slight gains, likely 0.1% to 0.3%, respectively. It’s earnings week for many equities, especially the financials and most are coming in better than expected, but the stocks are slow to rally. Just one more thing that makes this a most confusing time. Maybe Goldman’s numbers changes that. So with a few years in my back pocket, the more that things don’t make sense, the greater chance that an unexpected outcome may be headed our way. I am not suggesting that it will happen in the near-term, but the less of an effect that good news has on a market could mean it’s about to make a turn. Just saying.

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