THE MORE THINGS CHANGE – THE MORE THEY STAY THE SAME
It’s hard to envision that yields would be lower after one of the strongest employment prints in four years, but nevertheless they are. We could point to the 90 thousand gain in average jobs added in 2Q:14 versus 1Q:14 as affirmation that the polar vortex was in fact an anomaly from an economic growth perspective. We could also highlight how unusual the -2.9% first quarter GDP print was in light of strong manufacturing, employment and confidence gains during the same period. We could even state that we are entering the second quarter earnings season with the lowest level of revisions in years, yet another indication that the post winter growth prospects extends to corporate earnings. In each of these cases, we would have naturally thought that we could break out towards higher yields on the prospects of a 2015 Fed rate hike, possibly earlier than the market is expecting. In fact, we have seen several economists bring up their expected tightening dates, with the vast majority falling squarely in the second and third quarters of 2015. Yet we find that the longer end of the yield curve has actually fallen over the past week, with any selling focused on two and three year maturities. Additionally, futures markets now point towards an August 2015 rate hike, about one month earlier than expectations just a few weeks ago, and also more in line with the Fed dot forecast. We will point out that the yields on the 1y (51 bps) and 3y (1%) are at levels last seen in mid-2011. We therefore have started to build in commencement of the tightening process, whose procedural aspects the Fed discussed in detail during its last meeting.