Doug Drabik: March Madness

by Doug Drabik, CFA, Fixed Income, Raymond James

March Madness is upon us and the predictability seems certain or so we claim it to be what seems like year-after-year-after-year. And year-after-year-after-year we seem to be wrong. It reminds me of the Bazooka Joe “proverb”, “even a broken clock is right twice a day”. And no, I’m not talking about Villanova or Kansas or North Carolina or Gonzaga. I’m talking about interest rates and the Fed.

The future implied probability of a March FOMC rate hike is 100%! I guess the broken clock will be aligned just perfectly this Wednesday at 1:00 c.s.t. It sure seems like a broken situation when you consider the overall slow growth and low inflation of our economy. But… we can make statistics look like anything we want. You know how that’s done. If you graph data over a 5 year period it looks a certain way but the perception may change completely if you graph the data over a 20 year period. Everybody’s viewpoint gets slanted and is just a little bit different and the perception on the bond market is no exception.

Since the beginning of the year, the 1- to 5-year part of the curve has moved fairly together:

The later part of the curve has lagged slightly behind:

The central banks around the globe have controlled interest rates as best they can for years now. The open-market purchases of bonds have ballooned the central bank balance sheets and influenced rates across the yield curve. The influence of raising short-term rates may be very different. The market has paved the way and in many respects, pushed the Fed’s agenda ahead of schedule. Recall that early anticipation was for the first of three 2017 hikes to be in May, not March. Watch the shape of the yield curve. The Fed will likely influence short-term rates and continues determined, despite mixed economic data, to raise them. The long-end of the curve is largely dictated by inflation and the market, neither apparently convincing influences for higher rates. What may very well develop over the course of the year is a flattening curve, often a precursor to a recession. How global interest rate disparity changes, domestic GDP grows (or does not grow), inflation deviates and economic data reveals may eventually over-power any Fed stubbornness to will their way.

 

Copyright © Raymond James

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