Today is Fed day, with the interest rate and policy update due at noon MST. Although there is virtually zero chance the Fed will raise interest rates, with the recent developments in Europe, investors will be listening closely to any hint or clue as to the Fed’s plan going forward. If Great Britain decides to break out of the European Union, the US stock market is likely to suffer. Hiking rates now could further harm stocks, which the Fed will want to avoid. Further, with the German Bund rate falling into negative territory, the influx of foreign money into the US will likely create further downward pressure on the US 10 Year Treasury Note yield.
For now, we seem to be in a Goldie Lox position. With the US stock market hovering near all-time highs, mortgage interest rates at three year lows, a healthy housing market, strong employment and low inflation, the cards are stacked in our favor. However, it can only last for so long. There could be a time in the near future where something will give. Given the global pressures and sheer economic cycle to consider, the stock market and job market seem to be at risk. It seems at this point that there is greater than a 50% chance the US economy will fall into a recession at some point within the next 2-3 years. Since a rate hike would cause additional headwind for continued economic growth, the Fed is in a real pickle. Therefore, today’s comments from Fed President Janet Yellen will be closely scrutinized.
Although the bond market could react favorably to today’s events, the risk of floating remains elevated. Fed days generally elevate volatility and create a negative reaction in the bond market. Therefore, unless bonds are able to muster the strength to make a break higher, we will maintain our locking bias.