Market Update: Tuesday, May 24, 2016


  • U.S. and Europe higher, Asia mostly lower. Major indexes are moving higher as they look to bounce back from yesterday’s losses, which came amid broad weakness led by defensive stocks. Equity gains are also being spurred by WTI crude oil, which is finding support after Citi raised its 2017 price forecast. Overseas markets are mixed with financial stocks leading a rally in Europe, while Asia closed mostly lower; Japan’s Nikkei Index finished near session lows as traders fretted about central bank intervention in the currency markets. Elsewhere, COMEX gold is hovering near its low for the month, and Treasuries are near flat after finishing yesterday at 1.84%.


  • Rate hike expectations shift higher after hawkish Federal Reserve Bank minutes. Fed fund futures saw a sharp reversal from the recent trend following the release of the latest Federal Open Market Committee (FOMC) meeting minutes, with the market moving from not fully pricing in a first rate hike until June 2017, to pricing one in by November of 2016. Expectations remain relatively low for a hike during the June meeting, but the odds priced into fed funds futures increased considerably, from 4% at the beginning of last week to 30% by the end of the week. However, even after these moves rate hike expectations remain relatively benign relative to the Fed’s dot plot from the March meeting, with the median Fed forecast showing at least two hikes, and the market pricing in just one.
  • Will 2016 see a repeat of the Q2 2015 bond selloff? Although not perfect, the path of yields so far in 2016 bears similarities to 2015. Both 2015 and 2016 witnessed sharp declines in yield to start the year before yields moved higher during the second quarter. However, there are key differences this time around that may work in the bond market’s favor. European bond yields, which remain near all-time lows, are likely keeping downward pressure on U.S. rates, and though an increase in rate hike expectations also drove Q2 2015 bond market weakness, absent the Fed moving to a steady progression of rate hikes, we don’t see expectations coming unhinged and sparking a sell-off of the magnitude witnessed in Q2 2015. We discuss this in more detail in this week’s Bond Market Perspectives, due out later today.
  • Winners and losers in a challenging week for fixed income. Yields on 1- to 10-year Treasuries increased by 10-20 basis points (.10% – .20%), leading to a -0.6% return for the broad Barclays Aggregate Bond Index. Mortgage-backed securities performed well given the rise in rates, returning -0.3% (Barclays US MBS Index) but outperforming Treasuries (Barclays US Treasury Index), which returned -0.7%. Bank loans also performed well in the rising rate backdrop, returning 0.3% last week (Barclays US High Yield Loans Index). High-yield bonds also managed positive total returns, as represented by the Barclays US High Yield Index.
  • High-yield bonds resilient. The jump in interest rates was a headwind for fixed income broadly, yet high yield showed resilience as is often the case when yields move higher quickly. The Barclays US High Yield Index returned 0.2%. The strength in high yield was broad based; high yield energy spreads tightened modestly. The index ended the week at a spread of 6.1% to comparable Treasuries.
  • Municipal bonds inch lower, but still outperform treasuries. Municipal bonds barely broke a streak of three weekly gains with the Barclays Municipal Bond Index ending the week down -0.01% in the aftermath of the release of the FOMC minutes. Munis did manage to outperform Treasuries for the week, driving 10- and 30-year ratios to their lowest levels since May 2011 and February 2013, respectively, before they recovered slightly to end the week at 86% and 92%. Demand continued to help municipal performance as the sector posted its 33rd consecutive week of mutual fund inflows according to Lipper, but seasonality may be a headwind in the near future as June is historically a weaker month for municipal bond returns.
  • Emerging markets debt (EMD) weakens post-Fed. EMD yield spreads moved higher, even as oil saw gains. Like high-yield, EMD has been sensitive to oil price movements. The Fed minutes were the major driver, with spreads increasing 0.15% the day they were released, as markets priced in the potential negative impact a stronger dollar could have on EMD economies. Spreads ended the week at 3.96%, still below the 4% level at which buying interest has tended to emerge in recent years.
  • German GDP expands. The second revision to German gross domestic product (GDP) confirmed that its economy expanded by 0.7% during the first quarter. While officially expected, the relatively weak anecdotal evidence suggested that there might be a possible downward revision to growth figures. Consensus forecast for 2016 GDP growth has increased to 1.6% from 1.5%. Modest expectations, but an improvement for a region that has been flirting with recession. Investor confidence fell in April, possibly reflecting concerns over the continued health of the economy and the uncertainty around the British vote on remaining in the European Union.
  • More on the stock market’s all-time high drought on our blog today. The S&P 500 has gone a full year without a new high, as we discussed in our blog on Friday and again in this week’s Weekly Market Commentary. We take one final look at this on our blog today (post expected later today) with more historical perspective on this relatively unusual development and what it might mean for the bull market.



  • New Home Sales (Apr)
  • Germany (ZEW)


  • Advance Report on Goods Trade Balance (Apr)
  • Kashkari (Dove)
  • Germany: Ifo (May)


  • Durable Goods Orders and Shipments (Apr)
  • G7 Leaders Summit in Japan
  • Japan: CPI (Apr)


  • Consumer Sentiment and Inflation Expectations (May)
  • Yellen (Dove)
  • G7 Leaders Summit in Japan


  • Bullard (Hawk)
  • Japan: Retail Sales (Apr)

Click Here for our detailed Weekly Economic Calendar

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

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