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.
The economic data releases (personal consumption, auto sales, personal income, home prices) during May were indeed generally positive, all leading to a more hawkish tone from the Fed. The Atlanta Fed “GDPnow” second quarter estimate hit 2.5%. But just when the market was coming around to believing the Fed would raise rates in July, weak labor-market numbers changed the tone of the debate. Notably, non-farm payroll increases came in at 35,000 on June 2. This is very low indeed and took a near-term Fed rate hike off the table. It also led to a Treasury bond rally through mid-month. The Fed’s now dovish outlook was confirmed at its June 15 meeting.
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. Click to read full commentary