US market: government bonds shrug off hawkish FOMC minutes
Markus Allenspach, Head Fixed Income Research, Julius Baer
The minutes of the last meeting of the interest-setting Federal Open Market Committee (FOMC) were published yesterday. While the equity market reacted negatively to the notion that “some participants viewed equity prices as quite high relative to standard valuation measures” (in line with the comments from our equity strategy colleagues), the bond market largely ignored the notion that most participants favour a dual strategy of raising rates and lowering the balance sheet, in the current year! As a matter of fact, interest rate expectations went lower and the long end of the Treasury curve declined towards the close of the US market. Seemingly, the bond market is still convinced that there is more talking than acting from the Fed. Admittedly, the comments from the Speaker of the House, Paul Ryan, were not very encouraging about the prospects for tax cuts. Ryan was quoted yesterday as saying that the tax reform is much more complicated and time-consuming than the healthcare reform, and we all known that the latter could not be realised as planned in March.
share the positive economic view of the FOMC and still see room for higher US bond yields. In this environment, we focus on capital preservation with Treasury Inflation Protected Securities (TIPS) and exposure to variable-rate instruments such as US senior loan funds, while keeping the powder dry in other riskier segments such as US high-yield bonds and emerging market debt.