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Fixed Income Market Commentary by Kevin Giddis

June 12, 2019

The Treasury market is trading slightly higher this morning as more evidence of a lack of inflation was produced by today’s Consumer Price Index. The CPI for May rose only 0.1% as both a headline and core number. That takes the year-over-year figures to 1.8% and 2.0%, respectively. This will only give more fuel to those who are calling for a rate cut by the Fed sooner than later, and opens yet another conversation as to when this should occur. One thing that is happening is that the yield curve is shifting. The 2/10 spread got to a near-term wide of 29 basis points yesterday, then lost 4 basis points after today’s number. This flattening merely highlights the fact that there is an increasing number of “rate-cut converters” who believe that the Fed could act as soon as next month. The Fed Funds futures Probability Index puts a chance of a rate cut in July at 81%. Call me crazy, but I think if there is a trade deal with China over the next 30-60 days, the Fed will remain in place. But I do believe that when they next meet on June 18-19, the Fed Chair will make it very clear that the FOMC stands by, ready to act if the data warrants them to do so. Anything more or less than that likely chips away at their independence and could give the appearance that they are a “puppet” of the President. Yesterday’s 3-year note auction went quite well. The bid-to-cover ratio was a robust 2.62 times vs. 2.48 times last month. Even more impressive was the 58.6% indirect bid vs. May’s 37.9%. Demand for short assets like the 2-year and 3-year note is just one more indication that the market is very comfortable with the feeling that the Fed will be lowering the Fed Funds rate soon. Now if we could only get that stubborn U.S. economy to cooperate! Right now, that’s seems to be the only fly in the ointment for the Fed. The data from the U.S. economy doesn’t portend that a recession will be here anytime soon, and that is frustrating many of those who are calling for a rate cut immediately. The Treasury will be in the market once again today with the sale of $24 billion of 10-year notes. While we expect this auction to go well, investors may be leery of continuing to pack on more Treasury weight until more market clarity can be achieved.  All roads seem to be pointing to China, then Washington.

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