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Wednesday, March 21, 2018 |
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MANAGING DIRECTOR: |
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US Treasury Market |
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| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| 3/14/18 | 1.71 | 1.76 | 1.94 | 2.05 | 2.26 | 2.41 | 2.61 | 2.75 | 2.81 | 2.94 | 3.05 |
| 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 |
Source: U.S. Department of the Treasury, as of 3/20/18
Standby for Hawkish Fed
The FOMC announcement today at 1:00pm CT is a welcomed break from the Facebook conversation that has been plaguing news media this week. This will be the first announcement with Fed Chair Powell at the helm and the new voting rotation of regional Fed presidents. Along with the announcement that is expected to raise the Fed Funds Target rate up another 25bps to 1.75% is an update release of the Fed's Summary of Economic Projections (SEP) that includes the infamous DOTS plot and Powell's first press conference in the hot seat.
The market is expecting a more hawkish announcement with upgraded economic projections, which may warrant in the Fed's collective opinion to raise rate at a faster pace than projected 3 hikes for 2018 and 2 for 2019. There are a number of reasons why the market is expecting this:
- Hawkish group of voting members: Previous desenters, Minneapolis Kashkari and Chicago Evans, who were again previous hikes are no longer FOMC voting members. The new group of voting members now include San Francisco Williams who have been touting the possibility of 4 hikes in 2018 for several months even before the Fed tax cuts.
- Tax Cuts and Jobs Act (TCJA) and Bipartisan Budget Act (BBA): Both of these federal policies were enacted after the last "live" FOMC meeting in December which was the last update of economic projections. Since then the Fed members have been collecting data and research to account for how much boost the economy will receive from these policies. During Powell's semiannual testimony in front of Congress last month, he identified the fiscal stimulus as a "tailwind" that could warrant more or faster rate of monetary tightening to prevent "overheating".
- Strong economic data: Jobs, CPI, and real GDP have all seen continued growth and improvement since December. Though the most recent data showed a slow down in hourly wages earned and economic growth from the previous releases, the improvement continues and does not throw off the Fed's projection of reaching their 2% inflation target over the medium term (sometime in 2020). Recent CPI data supports the Fed's argument that inflation is rising as expected despite being well below 2%.
It will be interesting to see if there is any mention of recent trade talks that many fear to be a headwind to economic growth. A number of monetary policy makers and finance ministers globally have addressed their concerns on stricter trade policies that could hinder growth.
What not to expect is any real concern from the Fed about the recent "correction" in stocks or the latest news consuming drama over Facebook's breach of privacy. Last month NY Dudley completely dismissed any notion that the recent drop in stocks effected his view on monetary policy, a sentiment that is likely to be shared amongst the group.
Strategy: Much of the investment community will be on the sidelines until the announcement followed by the press conference Q&A. However, there are still deals coming to the market today while US treasury yields have cheapened a bit more ahead of today's event. Treasuries are on the cheaper side of recent trading ranges with the US Treasury 10yr currently 2.90% and US Treasury curve between 2yr and 10yr only 55bps. Quite a bit of the hawkishness has been priced in as well. If there is something that fits the portfolio, our suggestion is to take advantage of the product availability.
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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