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Fixed Income Market Commentary by Kevin Giddis

September 13, 2019

The Treasury market is trading lower this morning as last night’s trend of higher rates is continuing today as the hope of a trade deal or “trade relief” combined with better than expected economic data continues to fuel the risk-on trade. Is anyone still concerned that this was any more than a trade-related price rally followed by a trade-related yield rally? Even though growth around the world is struggling, even though the tariffs impacted the U.S. and Chinese economies, the U.S. economy seems to have shrugged a lot of it off, without the negative effect of inflation. Retail Sales for August came in at up 0.4% vs. and expected up 0.2%. Sales less autos were flat, but they were coming off an increase of 1% in July, so it’s not that surprising. So the 10-year note has made its way back to 1.85% vs. 1.45% a few weeks ago and the spread between the 2-year and the 10-year has widened to 8 basis points. While that is not a lot, it does seem to suggest that a recession isn’t any closer to us than inflation. This really puts the Fed in a tough spot. They go into next week’s meeting with a solid economy, pressure from the President, and a market expectation of the FOMC lowering rates. To say I understand this would be an overstatement. It seems clear that we got to 1.45% on the 10-year note from an abundance of fear about the effect of tariffs, and a longer term view of the effects on the U.S. economy. What we know now is that it just hasn’t happened, and that each side of the trade dispute seems to be looking to cut a deal, even a watered down one. We have in this country a unique opportunity to see both sustainable economic growth and low interest rates. The White House needs to do its job and cut a trade deal, the Fed needs to do its job consistent with its congressional mandate, either lowering rates or not, and the market needs to adjust to each. I think that bond prices are currently fairly balanced, that risk is still expensive, but the likely cost of “yield,” and that credit is in a pretty good place. I also realize that this is Friday the 13th, that things never operate in a vacuum, and that I could change my mind next week. Have a nice weekend!

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