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Fixed Income Market Commentary by Kevin Giddis

September 25, 2017

The Treasury market is trading higher this morning as the bond market adjusts to a new set of variables, while figuring out how to manage the existing ones. While German Chancellor Angela Merkel may have won the election, she certainly lost power within the base, which could make it more difficult to govern in the years ahead. North Korea remains in the spotlight as the rhetoric from both sides escalates to some real head-scratching proportions. Then there’s the FOMC and their latest meeting in which they laid out their plans to reduce its $4.5 trillion balance sheet. This was pretty much what the market had expected, so the response on this subject was mostly contained. What caused all of the fervor was that several Fed members supported one more rate increase in 2017. The “dot” predicted not only one more in 2017, but three increases next year as well. The mere suggestion of this caused the 10-year to sell off, pushing the 10-year note yield above 2.25% for the first time since the middle of August. My only comment is that it has been the desire of the FOMC to raise rates all year long, but the data has failed to support the moves, so they haven’t been able to execute this strategy for fear of knocking the legs out of the extreme state of moderate growth the U.S. economy has enjoyed. What has, or will change to allow the Fed to raise rates in December other than sheer will? While volatility hasn’t “spiked,” it has been moving steadily upward which isn’t surprising since we certainly live in a very volatile world these days, regardless of what the stock market thinks! Looking ahead to this week and beyond, traders will have a lot to deal with. The economic calendar is chock full of numbers starting with New Home Sales tomorrow followed by Durable Goods Orders, GDP (2nd quarter), Personal Income & Spending, and the Fed favorite PCE Core. There will also be a number of Fed speeches this week including one from the Fed Chair on Tuesday, where she addresses the U.S. economy and monetary policy. If that wasn’t enough, the Treasury will be in this week selling $26.0 billion 2-year notes tomorrow, $34.0 billion 5-year notes on Wednesday, and $28.0 billion 7-year notes on Thursday. For all of us who have been waiting around, hoping for more volatility, higher volumes and more attention paid to the fixed income markets, this week is your dream scenario. Add to that maybe healthcare and tax reform to boot. Be careful what you wish for!

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