Insights

Financial Industry Insights from Advisors Asset Management

Publication
Author
Topic
Content Type
Date

AAM Viewpoints – Fed Rate Hikes and the Bond Market Rallies?

The highly anticipated Fed Rate hike finally took place and the 10-year Treasury bond rallied 25 basis points from a 2.60 yield to a 2.35 yield. This with many agreeing – including some Fed members – that we are looking at two to three additional hikes this year. So what gives?

Many argue that Fed rate increases only impact the first few years of the yield curve, not the longer end. That makes sense; if rates are increased on the short end then the earlier years are the only ones directly impacted. If the Fed does raise rates two or three additional times this year, the short end of the curve will rise and if the longer end continues to rally then we are talking about a flattening yield curve, or to take it to an extreme an inverted yield curve.

As we have written in the past, an inverted yield curve translates into a recession. If the Fed raises rates, one of the primary reasons is the economy is doing well and it follows that inflation is heating up. This is in total contradiction to economic conditions that lead to a recession.

Given that there are two sides to every market, you could argue that there are those who think the economy is not doing as well as is written and debated. This side of the debate is more understandable now that President Trump’s initial push for health care reform has failed. Does that mean that tax reform and his infrastructure spending bills are in jeopardy? That would negatively impact a fueling of the economy and inflation.

I happen to be in the camp that there is enough evidence that the economy is doing well without tax reform or additional infrastructure spending and if these bills do indeed pass, the economic results will just be additive to the already healthy economy. I believe the yield curve will remain at a healthy steepness, the Fed will continue to raise rates (see AAM Viewpoints – The Economic Impact of the Yield Curve) and yields overall will rise.

 

Dec 2015

12/31/16

Current

U.S. Consumer Price Index YOY

0.7%

1.7%

2.5%

U.S. Consumer Core Price Index YOY

2.1%

2.1%

2.3%

U.S. Producer Price Index YOY

-1.1%

1.3%

3.0%

U.S. Import Price YOY

-8.3%

-0.1%

3.7%

Case Shiller 20 City composite

182.44

191.78

192.14

China Producer Price Index

-5.9%

3.3%

6.9%

China Consumer Price Index

1.6%

2.3%

2.5%

Euro Area MUICP YOY

0.2%

0.6%

1.1%

Citigroup Emerging Market Inflation surprise

-9.52

-0.59

7.01%

Source: Bloomberg, Citigroup, National Bureau of Statistics, Bureau of Labor Statistics, Eurostat
Past performance is not indicative of future results. | YOY = year over year; MUICP = Monetary Union Index of Consumer Prices.

To this point, as illustrated above, the economic indicators, current CPI (Consumer Price Index) and PPI (Producer Price Index) numbers are much more robust vs. the YOY (year over year) 2016 numbers. China, the euro area and emerging markets show similar results. Additionally, consumer and small business confidence indexes (below) are on a steady increase since 2008/2009 and the Conference Board’s index of consumer confidence is at a 16-year high.

These statistics all point to a healthy economy.

CRN: 2017-0403-5883 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

topics

×

Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.