Thursday, March 22, 2018
MANAGING DIRECTOR: Scott Carrithers   PORTFOLIO SALES AND SERVICE: Steve Panknin • George Morris • Jeff Goble • Chris Thompson • Sean Doherty Kevin Doyle • Lonnie Harris •  Mark Tranckino • Robert Schuyler • Tom Toburen • Josh Kiefer  Nicole Burczyk • Kelley Frye • Natalie Regan • Aaron Stoffer • Chuck Honeywell • Gus Koppen

US Treasury Market
Date	1 mo	3 mo	6 mo	1 yr	2 yr	3 yr	5 yr	7 yr	10 yr	20 yr	30 yr
3/15/18	1.70	1.77	1.95	2.07	2.29	2.42	2.62	2.76	2.82	2.94	3.05
3/16/18	1.71	1.78	1.96	2.08	2.31	2.44	2.65	2.78	2.85	2.96	3.08
3/19/18	1.70	1.80	1.99	2.08	2.31	2.45	2.65	2.78	2.85	2.97	3.09
3/20/18	1.76	1.81	1.97	2.08	2.34	2.49	2.69	2.82	2.89	3.01	3.12
3/21/18	1.71	1.74	1.95	2.06	2.31	2.46	2.69	2.82	2.89	3.01	3.12

                                                                                      Source: U.S. Department of the Treasury, as of 3/21/18  

Reading the FOMC... Hawk or Dove

Seems that everyone got something from yesterday's FOMC announcement and Chairman Powell's comments.  The hawks, doves, and everyone in between was able to read what they wanted.  This created volatility around the event and in the end bonds were not that much different.  

Another 25bps hike was the "one decision" made at this meeting, as Powell stated, which was no surprise at all.  However, the meat of the announcement comes in the form of their Summary Economic Projections (SEP) that shows upgraded forecasts for GDP growth and employment; however, inflation projections were essentially unchanged.  The improved forecast for GDP was front loaded as the median increased by 0.2% and 0.3% for 2018 and 2019, respectively, while 2020 and longer run was left unchanged.  Unemployment has been running at a low of 4.1% this year, which many consider to be tight.  Yet, the Fed now projects that it could further tighten to as low as 3.6% in 2019.  The most interesting part of all this after an increasingly upbeat tone on the economy is that the Fed left inflation projections unchanged for the most part.  Even though that hiccup in early 2017 should be rolling off the annual calculation of inflation growth that should boost the measure as the Fed be stating continuously, inflation projections are still unchanged.

Source: Federal Reserve. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180321.pdf 3/21/2018.


As for the rate of future hikes, the Fed is still projecting a median Fed Funds rate of 2.1% for 2018 (unchanged) and increased the projected rate for 2019 at 2.9% and 2020 at 3.4%  telling the market to expect more hikes in the years to come.  Of course that's a median of rates.  The updated DOTS show the majority of votes that are split between 2 (as previously projected) or 3 more hikes for the rest of this year.  Pending on which of those DOTS have voting rights in future decisions, the market should be more concerned of the possibility of 4 total hikes for this 2018 with the understanding that the pace of hikes could be speeding up.  


Source: Federal Reserve. https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20180321.pdf 3/21/2018.

 

The announcement and economic projections did not change the game at all yesterday.  The Fed's intent is still to push rates higher.  It may be more or at a faster pace, but still data dependent.  When asked directly about the possibility of these hikes inverting the yield curve, Powell did state that is something they are watching closely as it is a good indicator for recessions.  It was not an endorsement that they will stop hiking if the curve looks to invert; however, it does leave the door open for that possibility.

Strategy: US Treasury 10yr is currently 5bps richer from yesterday's close at 2.85% with the US Treasury 2yr-10yr curve still hanging on at 55bps.  That 3.00% level on the US Treasury 10yr is getting increasingly difficult to get to as now it seems that the market needs a major catalyst to push long rates higher.  Credit spreads are showing signs of widening though as benchmark muni yields are making new highs and spreads on MBS products continue to move out wider making them look more attractive.  All in all, we still favor cash flow products like high coupon munis and MBS products.  

This information is intended for institutional investors only. The material provided in this document/presentation is for informational purposes only and is intended solely for private use. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instruments.

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