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Post-FOMC Things That Make You Go Hmmm


Yesterday the FOMC (Federal Open Market Committee) minutes, and Chairman Powell’s comments, had a decidedly more dovish tone than the previous meeting. As a result, the market forecasts a 100% chance of a rate cut at the next meeting in July. Furthermore, the U.S. Treasury (UST) curve experienced a bull steepening; as the short end appropriately had a more pronounced move lower than the intermediate or longer end. This got us thinking about the implications to the rates market following past cuts to the Federal Funds Target Rate. We use the 10-year UST for this analysis since it is both the benchmark rate security and is relevant to most fixed-income investors based upon where they typically employ their investable assets. As we all know in the financial markets, history does not necessarily repeat itself, but it usually rhymes.


The below chart compares the past three periods when FOMC employed significant cuts to the Federal Funds Target Rate (upper target) and the resultant moves to 10-year UST rates. The red ovals identify the three periods (June 1989-September 1992, January 2001-June 2003, and September 2007-January 2009) during which major cuts were undertaken. The blue boxes highlight the move in basis points of the 10-year UST rate from the time of the first cut until the conclusion of the cuts.


brigati062019Source: Bloomberg


The chart highlights several points that are worth noting:



  • Each period resulted in greater than 200 bps (basis points) of movement in the 10-year UST rate during the period when cuts were taken – this excludes any rate moves prior to or following the time when the Fed was actively cutting its target rate.

  • Prior to the cuts, 10-year rates started their move lower in a predictive manner, as has occurred this time (green box).


Conclusions:



  • Should the Fed undertake an extended period of meaningful rate cuts, we should expect an extended period of a rallying interest rate market.

  • This should arguably push 10-year UST rates below the all-time low in rates in September 2016 of 1.38%. It is only 62 bps away at this point.

  • The long-term bull market trend in interest rates would appear to be intact and continue for the foreseeable future, at least until the expected FOMC rate cut activity ends.

  • NOT A PREDICTION, but if the previous pattern of a 200 bps move in rates ensues, we would then experience negative interest rates in the UST market.


CRN: 2019-0620-7504R


Past performance is no guarantee of future results.


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.

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