The Treasury market is trading just a bit lower this morning as the Fed has spoken and the market has responded. Even though the FOMC raised the Fed Funds rate by 25 basis points, the bond market either had it priced in already, or it isn’t believing the Fed’s continued thought that inflation is transitory and soon to be on its way. This is really all that this is about, isn’t it? The market concedes that we are enjoying pretty strong economic growth while continuing to create jobs. The issue at hand is that the wages aren’t really growing with the job creation, and prices are stubbornly dancing in place. Basically, the 2-year note remained close to a 1.80%, and the 10-year actually dropped a couple of basis points to 2.36% since the Fed raised rates. . That keeps the flat curve conversation alive, and opens up a new conversation as to what would a continued flattening of the yield curve mean for the forward view of the economy and interest rates. Keep in mind that this is a very mature economic cycle, but it could get a new boost of growth from the tax package, assuming it becomes law, and the moderate growth movement in the U.K. and in Europe. Both the Bank of England and the European Central Bank voted to keep rates unchanged, but each has a different issue to deal with. One (B of E) has a lack of growth, but an issue with inflation, while the other (the ECB) has a growth and “free money” issue. Those are just a couple of reasons why investment in the longer end of the Treasury curve remains strong. The Fed raised rates three times in 2017, and expects to raise rates three times in 2018, according to comments made by Fed Chair Janet Yellen. The yield on the 2-year note has increased about 60 basis points, just below the Fed’s move in Fed Funds. The 10-year note is a different story. We opened 2017 at a 2.45%, pushed upward to a 2.63% in March, then dropped to its current level of 2.35%. This tells us that the FOMC is being thoughtful with its moves, and the that the market, especially the further you go out on the curve, is saying that they don’t believe that inflation is coming, nor will come as the FOMC hopes and expects it to, no matter how many times they say it. That only works for Dorothy.
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