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Thursday, December 7, 2017

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

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
11/30/17 1.14 1.27 1.44 1.62 1.78 1.90 2.14 2.31 2.42 2.65 2.83
12/01/17 1.14 1.27 1.45 1.62 1.78 1.90 2.13 2.28 2.37 2.58 2.76
12/04/17 1.16 1.29 1.45 1.66 1.80 1.93 2.15 2.29 2.37 2.58 2.77
12/05/17 1.21 1.30 1.48 1.64 1.83 1.94 2.15 2.28 2.36 2.55 2.73
12/06/17 1.18 1.30 1.48 1.68 1.78 1.92 2.11 2.25 2.33 2.53 2.71

                                                                                                                                         Source: U.S. Department of the Treasury, as of 12/06/17  

Fed Raises Target Rate Again Next Week….Is It a Mistake?

When the FOMC meets next week the odds are 98.3% in favor of an increase of 0.25% in the Fed Funds Target Rate (FDTR) to 1.50% on December 13th.  The high probability comes from Bloomberg’s Future Implied Probability for the Fed rate hike at that meeting.  Future consensus expectations for 2018 indicate 3 more 25 bps hikes. If that happens, a year from now the overnight rate would be 2.25%.  The 5-30 year rates are lower than they were in December 2016, despite the Fed tightening of 75 bps plus another 25 bps baked in for next week. If all of this is priced into the bond market why don’t longer rates go up?

Good question.  The bond market doesn’t believe that the Fed tightening program toward “normalization” is necessary.  The market’s inflation expectations are extremely low, resulting in the flattest 2-10 year yield curve differential since 2007. The trend is accelerating and the difference between 5 & 10 year yields is down to 20 bps and sinking.  It seems like bond investors are fighting the Fed, but they are not fighting the tape.

There was an interesting article last week from Morgan Stanley that forecast a completely flat yield curve in 2018. That would make it even more difficult for bank margins. If it occurs, does the Fed reverse course in the overnight rate policy? Some have argued that the Fed had to get the funds rate up, so they would have room to ease again when things go south in the economy.

Granted the long expansion in the economy and the hot stock market raise concerns of some retracement, or a possible future wreck.  These concerns have been around for a while and the economy just gets better and stocks continue the long term trend in higher prices. The best maxims at the present time are “the trend is your friend” and “don’t fight the tape.”  Happy Holidays!



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