This week, the Federal Reserve made big news when it reduced the federal funds rate by 0.25 percent, its second cut this year. While any Fed action always dominates the headlines, the interest rate reduction was expected and fully priced into the market. Having raised federal funds a quarter point just last December, it has been a rather dramatic change of monetary policy in which the Fed has now cut rates twice this year.
The global search for yield has driven tremendous fund flows into all corners of the fixed income market. While our primary focus is on investment grade bonds, this trend has also driven yields lower on non-investment grade bonds which are sometimes referred to as “high-yield” or “junk” bonds.
Earlier in this expansion it was all about jobs. Each month, we would wring our collective hands over how many jobs were created, what kind of jobs were created and whether they were even good jobs. Today, while it is still a market moving number, the monthly payroll report doesn’t seem to carry as much mindshare with Wall Street.
For the week, the S&P 500 returned -1.41 percent and the 10-year U.S. Treasury bond yield declined to 1.51 percent. On Friday, the S&P 500 declined by more than 2.5 percent on news that China had escalated the trade war which was coupled with a similar response from the White House.
On Wednesday at midday, the global financial media held their collective breath as the benchmark U.S. Treasury Yield Spread (2-year/10-year yield) inverted. Then, as they exhaled, minor hysteria ensued.
We were in consensus regarding our 2019 Investment Outlook theme, “The Fasten Seatbelt Sign Is On,” and this week’s market volatility reinforced that we landed on the right message. The Dow was down by 600 on Tuesday and then rallied by nearly 1,000 points within 24 hours.