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Rates Move on Trump Speech, Fed Talk, Fiscal Policy Expectations

The 10 year Treasury closed today at 2.46%, up 15 bps from last Friday’s recent low of 2.31%. The 2 year Treasury reached 1.29%, the highest since 2009 (note that the 2 year Treasury is the most sensitive to potential Fed moves, as it is a “like” short term rate, while long term rates are also subject to inflation expectations). This followed a period of both equity and bond prices rising and we are now seeing the classic divergence as investors sell bonds and buy stocks. Why? (1) Inflation is back. The Fed’s preferred inflation indicator, the Personal Consumption Expenditure index, rose 0.4% in January with an annual growth of 1.9%. This is very close to the Fed’s target inflation rate of 2.0%, and the highest since October 2012; (2) Voting members of the Fed’s policy committee have remarked that a rise may be “sooner rather than later, in the very near future”. This points to a March increase, as the next meeting with a press conference by Fed Chair, Janet Yellen, is not until June; (3) Washington. Recent announcements of an increase in military spending, President Trump’s speech last night, and his meeting today with Congressional leaders with a stimulative agenda of corporate and middle class tax cuts and infrastructure spending not seen since the Eisenhower administration (a shout out to the building of the interstate system). Does this all mean the awaited fiscal policy will be happening? Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners.

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