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Fixed Income Market Commentary by Kevin Giddis

April 24, 2018

The Treasury market is trading very quietly this morning as the cat-and-mouse game continues in the near-term quest to see a 3% handle on the 10-year note. While this level is mostly symbolic, traders are seeing the resistance to this as a positive sign for bonds. In all likelihood, we will cross over the coveted level, but the longer it remains a big hill to climb, the more interesting the trade becomes. The fundamentals may or may not help much until later in the week, but a big Home Sales number might do the trick. The expectation is for an increase of 1.9%, so something over 2.5% could be enough to push 10’s through 3%, but who knows. It could also weaken if the auctions don’t go well too. Tomorrow the Treasury begins its sale with the auction of $32 billion of 2-year notes. On Wednesday its $35 billion 5’s and Thursday we will get the sale of $29 billion 7’s. If any of those auctions see a downside demand surprise, it too could be enough to breach the 3% barrier. Ok enough about that. The bond market is responding as you would expect, especially in the face of strong economic data, rising inflation levels and a FOMC that seems to be resolute in its quest to raise short-term rates. At some point though, you can’t ignore the growing budget deficits and the financing requirement to support tax reform. You also can’t ignore the growing risks of a geopolitical event, which could send money flowing into safe haven instruments like Treasuries. Do I sound like a bitter, mostly bulled-up bond guy? Maybe. But maybe it’s my cautious nature, and that I have seen and lived this story more than once in my career. What I have learned is that very few saw the crash in 1987, the rate rise in 1994, the tech wreck in 2000, and the financial crisis in 2007 coming. I am not saying we are about to see that now, but the common thread that all of those periods share was that most of the “predicators” of future activity were all on the same side. As I have stated in the past, we are at a very mature stage in this recovery, and they all run their course. I guess I would feel a little better if the White House wasn’t so unpredictable. I also realize that it can be as helpful as it is harmful, but there aren’t any secret formulas that haven’t been tried. Over time, I worry that this economy will be crushed by the weight of its own debt, and it won’t be long before investors see that as well.

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