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Fixed Income Market Commentary by Kevin Giddis

March 21, 2018

The Treasury market is trading ever so slightly lower this morning as traders look to hold positions in a fairly “hedged” state until the Fed concludes its 2-day meeting and the freshly minted Fed Chair, Jerome Powell, takes to the airwaves to explain the FOMC’s actions and what it anticipates on a forward-looking basis. Maybe that is asking too much of the Fed, but there seems to be very little focus on anything else. Yields have once again been creeping higher, with 2’s and 10’s rising about 4 basis points since the start of the week. The market has priced in and expects the FOMC to raise the Fed Funds rate by 0.25% to 1.75%, and maintain their higher rate bias for the balance of the year, citing continued economic growth and a fear of inflation as the reasons for staying on that path. The only flaw in that way of thinking is that inflation isn’t really all that present, and some of the more recent economic numbers are beginning to show some cracks in the strength of the U.S. economy. Whether that continues as a trend or is a short-term phenomenon is something that the Fed will have to monitor. The data still points to three rate hikes, although a number of economists think there could be four. I would be very surprised to see four, and I am a mild seller of three, but we will have to see how this plays out, and our first clues will likely come at today’s news conference. Existing Home Sales for February rose 3.0% after falling 3.2% in January as the effect of higher rates giving a mixed picture for home sales. The rate rise of Libor has gotten a lot of attention these days, but I don’t believe it is anything to worry about like it was prior to the crisis in 2007. Most economists point to the fact that the sharp increase in Treasury bill auctions and the post-tax law repatriating of dollars as the main causes for the spike in Libor, and they will adjust back down by summertime. For now, that is keeping the markets calm, but we will add that to a list of things that we are closely watching. The other one is trade. An all-out trade war would likely change the way economists view the future of the U.S. economy and the Fed’s monetary policy should things escalate, so pay close attention to the rhetoric and hope that is stays just that. So while the FOMC takes center stage today, there are a number of “points of interest” that could affect the markets in the near term. “Stay thirsty my friends.”

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