Bonds traded impressively in the face of several important events this week. The most important economic event was the announcement by the Federal Reserve to increase short-term interest rates by a ¼% in response to a strong economy. They also stated an intention to pick up the pace of future increases. In his press conference, the current Fed chair, Jerome H. Powell, discussed the need to continue to raise rates in response to a strong economy, which is at nearly full employment, and signs of rising inflation. The Fed raises short-term rates as a defense against overheating the economy and to help protect against asset bubbles, but this comes at a cost to consumers and businesses who will experience higher borrowing costs.
Two other important global events, the U.S. and North Korean summit and the European Central Bank meeting, were also potentially hazardous to bond yields. The US-N.Korea summit was a success which lessened geopolitical tensions and the ECB announced that it will begin winding down its stimulus program, known as quantitative easing, later in the year, but did not expect to raise interest rates until well into 2019.
To make things worse for bonds, the European economy is showing signs of slowing and there’s an emerging threat of a trade war with China, both of which would certainly cap the rise in U.S. bond yields.
We continue to remain cautious with respect to interest rates and are biased toward locking-in rates, especially with the 10-year Treasury note trading near 2.90%.