Market Review

The market continued to be focused on potential policy changes by the new administration. Discussions around tariffs and border taxes have been somewhat disconcerting. The policy focus has been geared more towards immigration and the Affordable Care Act, rather than tax cuts and fiscal policy.

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What a difference a couple of events make. Or more precisely, a number and a vote. While we anticipated writing a quarterly commentary that detailed the typical gyrations of the bond market – “disappointing economic data releases in April followed by positive growth news in May, modestly lifting then depressing bond prices” – a June payroll number and the Brexit vote stole the show.  

Yields began to climb again as economic releases started to look promising, but this was a very short-lived trend as June 23 brought the Brexit vote. Markets were taken aback as U.K. citizens unexpectedly voted to leave the European Union. The vote threw global financial markets into turmoil and engendered a flight to quality. Treasury yields dropped precipitously and the yield curve flattened.

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The U.S. economy began 2015 at a feeble pace, weighed down by the West Coast port closing and a brutal winter through the central and eastern portions of the country. Reflecting the economic softness, interest rates fell dramatically during January 2015, with U.S. Treasury benchmarks hitting their low yields for the year by February 1. The 10-year was a stunning 46 bps lower for the month, yielding 1.77% on January 31, with some market prognosticators proclaimed it was headed toward 1.25%. 

Instead the weakness proved transitory. When rates bounced back in the spring, they remained in a relatively tight range. This was surprising given the elevated geopolitical and economic events.

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