Fixed Income Market Summary: First Quarter 2014
- Weak economic data in January and February pushed Treasury rates lower, despite the anticipation for higher rates after the Fed’s tapering announcement in December and February. Much of the blame for early weakness in the data well into February has been placed on the dramatic weather events across the country.
- Fed Chairman Janet Yellen’s comments after the March Fed meeting, where a third reduction in bond purchases was announced, indicating the first Fed Funds rate hike would be “six months after the end of the QE program” caused a spike in rates across the curve, most heavily felt in the 2‐7 year maturities. This trimmed the quarter’s returns, substantially in the intermediate durations, though they remain significant given last year’s losses.
- The most commonly cited risk to the domestic fixed income market over the next six months, is the potential for market participants to over‐react to better than expected economic news in the second quarter, which is likely to largely be rooted in delayed demand/consumption from the first quarter. A sharp jump in rates could impact consumer and business confidence.
- Virtually all of the forecasts are for marginally higher rates through the end of 2014, meaning the bulk of the first quarter gains are likely to evaporate if these forecasts are correct. Further, if these forecasts are indeed correct, we should continue to see a flattening of the yield curve over the next year. This would most likely impact the 2‐5 year portion of the curve the most in the intermediate term, as the Fed will continue to have rates under 1 year essentially pinned down until the QE program officially ends.
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