Swings in the fixed income market

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Recently, fixed income swings have been dramatic and yields have fallen in conjunction with that activity. Both internal and external factors have given rise to the perfect storm of events that all point to lower yields. Given the lack of inflation in the economy, the lack of ability for Congress to pass an economic bill, geo-political events with North Korea, Hurricane Harvey and Irma, and relations in the Middle East, the flight to quality in fixed income has been prevalent.

The lack of optimism came to a head on September 5 as the North Korean situation heated up. The result was a selloff in equities and a precipitous rise in U.S. Treasuries. As a point of reference, the 10 year Treasury started August at 2.29 percent and now currently sits at only 2.07 percent at market open as of September 6. We are now at lows for this year and a far cry from where we started the year at 2.44 percent, and even further from where we stood in March at 2.65 percent. The predictions of a 3 percent 10-year Treasury by year-end seems improbable now given the recent events, but as we know, things can change quickly in this environment.

With the lack of fiscal policy happening, we again look to the Central Bankers of the world for direction. The EU’s Mario Draghi is set to give more clarity on the winding down of their bond buying program and the U.S. Federal Reserve members should be commenting on the lack of data that allows them to tighten at a more aggressive pace.

Going forward, we will continue to monitor the average life of the portfolio along with the credit structure to see if any adjustments need to be made.

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