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Fixed Income Market Commentary by Kevin Giddis

November 17, 2017

The Treasury market is trading higher this morning, even though the Housing numbers came in better than expected. Housing Starts for the month of October rose 13.7% and Building Permits were up 5.9% as well. Both numbers were in negative territory last month. Call it a bounce back from the hurricanes or call it a rush to finance at lower rates, but either way, it was a surprise. On top of that, the House passed its version of the tax bill, which one would think could point to higher rates…if passed. So why are rates falling today? Mostly because it’s the “next best trade” to buying equities. If you want to, for whatever the reason, take some risk off the table, Treasuries still make sense as an investment. I know this flies in the face of most of the “talking heads”, who have now predicted 14 of the last 2 rate rises, but U.S. government bonds remain the prettiest of safe debt options around the globe. Add to that the Fed’s inability to inflate the U.S. economy, even with a pocket full of cash, and you might understand why the 10-year is sitting at a 2.35% and not 3.0% like so many have suggested would happen in 2017. That won’t likely stop the Fed from raising rates next month, but the bond market seems to be telling us that it isn’t necessary either. In fact, you could even make the case that if the FOMC raises rates next month, it could do more harm to the economy, stunting its growth in the process. This difference of opinion is why we are seeing the yield curve continue to flatten. The bond vigilantes aren’t drinking the Kool-Aid, and it wouldn’t surprise me to see the curve flatten further by the end of the year. As we turn our attention to next week, look for the market volume and volatility to decline. It is a short week, with only a few important economic numbers, which may increase the “chop,” but not likely move rates much in either direction. We have spent the whole week with the MOVE Index below 50. It is hard to believe that volatility could drop further, but yet here we are!

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