Treasury Yields Trading in Tight Range, ECB’s On Schedule “Shadowing” US Fed Moves

Markets are in the classic conundrum: “on one hand – but, on the other hand -.” As usual it’s a case of whether to focus on today’s good news (US economy at full employment and expected to report 2nd Quarter GDP at an eye popping 4.9%) or what may happen in the future (an all out trade war between US and China). The trade war jitters are feeding a flight to quality treasury rally. The full employment, productivity and GDP numbers combined with a hawkish rate-raising speech by Fed Chair Powell in Europe should have spiked yields well above 3.00%, but the 10 year is sitting at 2.93% after dipping below 2.90% this week. Speaking of Europe, ECB Chair Draghi shed some light on the winding down of ultra accommodative stimulus policy by the ECB. He indicated the ECB will stop its bond buying program this year and won’t start raising rates until summer 2019. This is noteworthy as it signals another “end of an era” of mega stimulus stemming from the Great Recession and subsequent Eurozone crisis of 2010-2012. This is reminiscent of the US Fed, which stopped bond purchases in Oct 2014 and started raising rates in Dec 2015. Note that the ECB started their bond buying in 2015, years after the US Fed had implemented Quantitative Easing. So now, hopefully Europe’s economy can soon stand on its own in a “normal” rate environment and without central banks propping up bond prices and “artificially” compressing spreads. It’s all uncharted territory as the entire era is unprecedented. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners