While we are still debating the meaning of “six months”, treasuries have
moved to a more aggressive tightening schedule, while simultaneously accepting
that rates can remain at historically low levels even after rate hikes begin.
Since we are in the camp that “six months” does not mean an April
2015 hike is imminent, we find the dichotomy of these events as an incorrect
interpretation of last week’s FOMC meeting. Much of the initial move towards
higher yields in the long end of the curve has since reversed, with the 10-year
just two bps higher than last Tuesday’s close. The curve has flattened
significantly as the belly continues to underperform and the two and three-year
note touch levels not seen since mid-2011 (with the exception of the spike last
fall caused by the Washington shutdown). In contrast, credit continues to
perform strongly, buoyed by a lack of new issuance recently along with cheaper
levels in the intermediate sector. With earnings set to begin, the blackout
period may further limit new issues, providing corporates with support despite
touching YTD tight spreads. From a total return perspective, most fixed income
sectors will likely post a negative month, with high yield, taxable municipals
and preferred the positive outliers. Read the full
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