Fixed Income Highlights
- In like a lion, out like a lamb. This month’s title refers not to weather but to market fears of rising rates. Those peaked on March 6th with a better-than expected employment report pushing the 10-year briefly to 2.25%. Weakening economic data and much more dovish guidance from the Federal Reserve reversed those trends, leaving the 10-year to end the month at 1.92%, fueling modest positive bond returns in March.
- Mending the Gap. With this new guidance, the Fed went a long way towards closing the gap to market expectations. This is important in establishing the best possible environment for mitigating any potential negative market reaction to the first increase in interest rates. The implication for our outlook is that this lowers, but does not eliminate, the risks of rising interest rates this year in the front end of the curve. Reflecting this viewpoint, we cut our year-end 2-year forecast from 1.75% to 1.25% reflecting the lowered expectation for year-end 2015 fed funds rates, but leave our 10- and 30-year forecasts unchanged at 2.50% and 3.0%, respectively.
- Cold Comfort. We note that lower bond yields in March came in an environment of steadily disappointing first-quarter economic data. The pattern of weak first quarter data has been the case for most of the past five years, but the second half has consistently outperformed. Notwithstanding these seasonal characteristics, the ongoing improvements in labor markets fueling rising incomes, falling oil prices fueling disposable income growth globally, and the rising confidence of business for capital expenditures and investments all point to a recovery in growth in the second half. Extrapolating lower rates from weak growth further pushing back the Fed from tightening therefore looks misguided.