Market Review

Treasury yields declined modestly during the month and the yield curve flattened, a continuation of trends seen for most of 2017. Ten-year yields initially rose to 2.41% early in the month, before falling to 2.23% at monthend. The 2- to 30- yield curve spread has declined by 30 basis points since the beginning of the year.

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Disappointing economic data and concern over the impact of the French presidential election weighed on the market, leading investors to buy bonds and push rates modestly lower. Treasury yields fell from two years and out, with the 10-year portion being the biggest beneficiary, flattening the yield curve.

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One of the biggest surprises this year may be how staid the markets remained regardless of news, global events, and economic data. In January, we saw the first presidential change in eight years. Many feared that the tweeting and rhetoric common during the campaign may have an impact on financial asset prices. Instead, even with a senior administration official resigning, news of an FBI investigation, and the failure of signature legislation, markets barely moved. 

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Economic statistics continued to provide a mixed message about the strength of the economy, with trade and GDP figures disappointing but payroll and retail sales data showing some improvement. Inflation ticked up and core CPI hit 2.3% year-over-year, high enough to raise red flags for Fed watchers. In fact, the Federal Reserve meeting minutes released mid-month led a number of investors to believe that the Fed was moving toward a more hawkish stance.

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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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The year 2016 was full of surprises that will not soon be forgotten by fixed income investors. It began in the form of a strong government bond rally, followed by an even stronger rally in corporate bonds. High yield returns were spectacular.

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