UNCONDITIONAL SURRENDER
While we have had many opportunities to move the needle in terms of price volatility over the past few weeks, we maintain the stubbornly range bound nature for the markets that have dictated trading for the better part of the current quarter. Included in these significant market events have been the ECB meeting, FOMC rate decision and forward forecast, BOE testimony, and the regular litany of global economic data. While there have been various idiosyncratic asset class changes, many of these initial moves have petered out and we remain in the clutches of central bank dictated trading. Along the way, we continue to see a trend towards greater risk taking that has driven positive ETF flows into domestic and international equity indices, EM strategies, and the high yield market. Spread levels have pushed to lows not seen since 2007, while high yield continues to defy skeptics and print new low yield after new low yield. What has been surprising about the complete lack of volatility has been the generally supportive data that continues to point towards a rate hike in 2H:15 based on our estimates. At this point, it does not appear that Yellen & Co. are in any rush to change their low for longer messaging, providing themselves with such a wide berth on data interpretation that they will likely fall behind the curve if data continues to improve as we expect. Having said that, the market has become complicit in following the Fed’s directions and does not appear willing to push towards higher rates without a clearer picture of the Fed’s timetable. Additionally, with geopolitical concerns taking center stage, along with the potential cap on U.S. rates caused by the global sovereign rate differentials, we see a limit on the potential rise in yields, even as we continue to expect a move towards the higher end of recent ranges based on improving data.