GOING WITH THE FLOW – RATES PUSH TO LEVELS NOT SEEN SINCE JUNE-2013
At the risk of sounding like a broken record, the trends that have been in place since the start of the second quarter remain largely intact. Specifically, the market continues to defy the experts by pushing to lower yields without particularly upsetting any of the worlds other asset class apple carts. Within this background, rates have been the outperforming asset class, with periphery yields compressing between 35 and 50 basis points (bps) since the start of the current quarter, while the U.S. Treasury 10-year is down 30 bps. Not to be outdone, yields in the remaining G7 curves are also 25-35 bps lower with the exception of Japan, but, at 58 bps, where can those yields really go. The reasons for this compression are well known by now, with central bank manipulation (or CB liquidity in its more palatably acceptable vernacular) continuing to drive asset values. Where most experts, us included, got it wrong at the start of the year, was the expectation that a strengthening U.S. economy would be the wind beneath the sails that would lift all yields higher. While we are encouraged by recent improvements in economic data, with bubbling signs of inflation, somewhat stable housing data, and an unemployment rate that will see a five-handle soon, we still don’t think the Fed is likely to change its low for long commentary. The reason for their approach is up for speculation, whether it be fundamental economic weakness lurking under recent data gains, global growth issues waiting to envelop unsuspecting economies, a structural move towards lower inflation, or the need to manage the Fed’s massive balance sheet during the tightening process all legitimate theories.