The Weekly Report

  • Treasury flows after NFP this morning looked convincing, but actually fell short of pre-Labor Day trading on the August report. Trading reignited as the dollar slipped on the potential N Korea will test an even longer range missile than those it has fired this year. Nervous buying didn’t reverse the oddly confident selling on the labor report, but it certainly reminded investors higher rates aren’t the only investment risk.
  • With expectations about the Fed’s hike much more confident after the September labor numbers, next week’s FOMC minutes won’t be traded that closely. Instead the honor of the most important news falls (again) to CPI on October 13. The cover shows that economists think the inflation turn already has arrived.
  • It’s not too early to think about 2019. Central bankers concentrate solely on short-term rate policy, believing longer rates will follow in the same direction. Historically, though, that hasn’t been true for two decades so strategy has to consider the impact of debt leverage as well. Unfortunately, leverage is still going in the opposite direction of expected path for the target rate. Leverage usually wins out to keep rates stable, but the article introduces the complexities of the argument of 2019.
  • With returns so lopsided in favor of equities, investors are almost forced to maintain some exposure to high grade fixed income as a partial hedge against falling stock prices caused simply by stalled momentum. Unusual bond and stock market conditions need to be viewed together rather than targeted separately. Illustrations of how ever improving equity valuations are supporting unusual long positions in 10-yr UST.
  • Last, a look back at the Treasury-centric punishment in fixed income in September, a trend that continues so far this month as most spreads tighten further during the sell-off.
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