Bonds Commentary
Previous

Bonds: Remaining Range-Bound

July 2018

As noted previously, the FOMC dot plot released in the wake of the Committee’s June 12-13 meeting highlighted an expectation among FOMC participants that a Fed funds rate target range midpoint of 2.375 percent at year-end would be “appropriate monetary policy.” Interestingly, the median expectation among dot plot participants was that the Fed funds rate by year-end 2019 will need to be above the FOMC’s own longer run median estimate for the neutral Fed funds rate. The FOMC dot plot effectively pulled forward one rate hike previously included in the Committee’s 2020 projection, raising the expectation for 2018 by one hike and leaving expectations for 2019 alone. By pulling forward one rate hike, the Committee was perceived to be more “hawkish”, dragging yields on long-dated Treasury bonds lower. The yield on 10-year U.S. Treasury bonds dropped from 2.98 percent on June 13 to 2.85 percent at month-end, and the yield on 30-year Treasury paper fell from 3.10 percent to 2.98 percent.

The yield curve has continued to flatten out, with the 2/10 spread compressing down to just 33 basis points at the end of June. Investor concerns over a yield curve inversion may come into play sooner than we had previously anticipated. Trade war fears and what is perceived to be a more hawkish FOMC are acting as powerful gravitational forces for the long end of the curve, and together should keep long-term interest rates under wraps, barring a thawing of icy trade relations near-term. The European Central Bank (ECB) appears poised to remain accommodative well into 2019. Market participants initially expected policy normalization via rate hikes to commence in the back half of 2018. An incrementally more dovish ECB, an incrementally more hawkish FOMC, continued repatriation of foreign profits by U.S. multinationals, political angst abroad, and stubbornly low wage growth, make U.S. Treasuries attractive, for domestic and foreign investors alike.

The 10-year yield has been trading in a wide range between 2.7 and 3.1 percent since the start of February, finding a “comfort zone” between 2.8 and 2.95 percent. It’s likely in our view that 3 percent will act as significant near-term resistance on the upside, while 2.75 percent should provide meaningful support. With short-term yields rising and long-term yields falling, the best opportunity for investors appears to be on the short end and in the belly of the yield curve. Credit, while still expensive, is less so than had been the case earlier in the year. The yield-to-worst on the Bloomberg Barclays U.S. Corporate High Yield Index sat at 6.49 percent at month-end, a year-to-date high, and the highest level since the end of November 2016. High-yield defaults remain subdued, and the rally in energy prices lends support to approximately 15 percent of the Index, but we’re late in the game, and we’re likely closer to the exits in high yield than we are to playing extra innings. While Treasuries may be garnering capital at present, we would use the recent rally in Treasuries to re-position on the shorter end of the yield curve, while diversifying via structured products and dollar-denominated emerging market debt.

Source: Bloomberg

Next

On a scale from 1 to 5, with 1 being 'Not Good' and 5 being 'Excellent', how would you rate this article?

Press enter to submit your rating

Rate this Article

Use this form to provide additional feedback based on the rating you provided.

Thanks for Rating

Would you like to provide feedback?

Thanks for your feedback!

The content and any portion of this newsletter is for personal use only and may not be reprinted, sold or redistributed without the written consent of Regions Bank. Re¬gions, the Regions logo and other Regions marks are trademarks of Regions Bank. The names and marks of other companies or their services or products may be the trademarks of their owners and are used only to identify such companies or their services or products and not to indicate endorsement or sponsorship of Regions or its services or products. The information and material contained herein is provided solely for general information purposes. Regions does not make any warranty or representation relating to the accuracy, completeness, or timeliness of any information contained in the newsletter and shall not be liable for any damages of any kind relating to such information nor as to the legal, regulatory, financial or tax implications of the matters referred herein. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Regions Wealth Management is a business group within Regions Bank that provides investment, administrative and trustee services to customers of Regions Bank.

Neither Regions Bank nor Regions Institutional Services (collectively, “Regions”) are registered municipal advisors nor provide advice to municipal entities or obligated persons with respect to municipal financial products or the issuance of municipal securities (including regarding the structure, timing, terms and similar matters concerning municipal financial products or municipal securities issuances) or engage in the solicitation of municipal entities or obligated persons for such services. With respect to this presentation and any other information, materials or communications provided by Regions, (a) Regions is not recommending an action to any municipal entity or obligated person, (b) Regions is not acting as an advisor to any municipal entity or obligated person and does not owe a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934 to any municipal entity or obligated person with respect to such presentation, information, materials or communications, (c) Regions is acting for its own interests, and (d) you should discuss this presentation and any such other information, materials or communications with any and all internal and external advisors and experts that you deem appropriate before acting on this presentation or any such other information, materials or communications.

Employees of Regions Asset Management may have positions in securities or their derivatives that may be mentioned in this report or in their personal accounts. Additionally, affiliated companies may hold positions in the mentioned companies in their portfolios or strategies. The companies mentioned specifically are sample companies, noted for illustrative purposes only. The mention of the companies should not be construed as a recommendation to buy, hold or sell positions in your investment portfolio.

This communication is provided for educational and general marketing purposes only and should not be construed as a recommendation or suggestion as to the advisability of acquiring, holding or disposing of a particular investment, nor should it be construed as a suggestion or indication that the particular investment or investment course of action described herein is appropriate for any specific retirement investor. In providing this communication, Regions is not undertaking to provide impartial investment advice or to give advice in a fiduciary capacity.

*Investment, Annuities and Insurance Products

  • Are Not FDIC Insured
  • Are Not Bank Guaranteed
  • May Lose Value
  • Are Not Deposits
  • Are Not Insured by Any Federal Government Agency
  • Are Not a Condition of Any Banking Activity