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Is The Bond Market Suggesting A Weaker Economy?

CAMS Weekly View – Week Ending 3/31/17

April 3, 2017

Is the Federal Reserve raising interest rates into a weakening economy rather than a strengthening economy?  The bond market is hinting this is the case.

Sprinkled within recent Weekly Views we have mentioned the behavior from the bond market as being an inter-market sign of caution as general stock market caution was shared.  The bond market as a whole represents many types of offerings, from various risk categories in corporate bonds, to Treasuries, to International, etc.  To be clear, the overall bond market is not ringing alarm bells of imminent recession.

The Treasury Yield Curve’s behavior in recent months continues to run counter to the general consensus view that as the FED raises short term rates all interest rates will rise in a general upward direction throughout the various maturity offerings.  That is, as the 3 Month or 2 Year Treasury interest rates rises with FED hikes the (more distant in maturity length) Ten Year Treasury Rate will also rise reflecting a synchronicity of beliefs of a stronger economy from both the FED and bond market participants.

When synchronicity fails to occur, as it has in recent months, it represents a more cautious tone from bond market participants on their view of the economic landscape.


(Click For Larger View:  http://schrts.co/aJbp7T)

The above chart depicts a portion of the yield curve as mentioned above.  The gap (a.k.a. the interest rate spread) between the 2 Year Treasury Rate and the 10 Year Treasury Rate is visually presented in the chart.  As the general trend goes lower, as reflected by the red line, this tells us the gap (or spread) between the 2 Year and the 10 Year Treasury Interest Rate has contracted.

As shared previously, if the FED and bond market participants are in a synchronous belief of rate hikes occurring into a strengthening economy, the above chart would not be trending lower in recent months.


(Click For Larger View:  https://fred.stlouisfed.org/graph/?g=ddB4)

Speaking of the economy overall, the above chart depicts the Gross Domestic Product (GDP) dating back to 1990 for a broad perspective.  The chart represents the percentage change in GDP from a year ago.  A notable observation offers how historically weak our annual GDP growth has become since 2000, in particular since 2004.  Whereas 3-5% growth was common, since 2000, it has become nearly unattainable.

In addition, looking to the far right of the chart we see our annual growth rate is trending down.  Furthermore, per the Federal Reserve District Bank of Atlanta’s “GDPNOW” calculation, our First Quarter 2017 GDP figure will be trending lower as well.  (Visually presented here:  https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1)  All told, bond market participants’ caution may be warranted.

I wish you well…

Sincerely,

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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