U.S. Outlook: The fixed income market just blinked
To quote the great Clint Eastwood, U.S. bond and money markets seem to have been saying to the Fed, “Go ahead…make my day!” Or maybe, “You’ve got to ask yourself one question: ‘Do I feel lucky?’ Well, do you punk?”
The Markets have been ignoring signals from the Fed and pushing rate hike expectations into 2016 and 2017, pushing 10-Year Treasury yields back to the lows of 2012. 
The day of reckoning is approaching – March 18. The March FOMC statement and economic outlook and dot-plot projections will be key information for the fixed income market. For a detailed look at this and other developments, see my full weekly analysis. Highlights are outlined below, followed by a link to the full U.S. Outlook report, delivered on Feb. 13.
Key observations:
- Speeches from Federal Reserve Governors and Bank Presidents have actually deviated little from the median FOMC guidance from the December dot-plot.
- Does the market know something we and the Fed don’t? The risk of prolonged global deflation and recession could be a higher probability than the Fed currently foresees.
- Has the market completely lost faith in the Fed’s forecasting credibility? After years of overestimating economic growth and rate expectations, the Fed may be seen a bit like the little boy who cried wolf. Investors could be ignoring them when they really mean it this time.
- Has the market been listening to Yellen’s soothing words, but failing to read the fine-print of the dot-plot? This suggests a miscommunication from the Fed that has markets mispricing interest rate expectations.
- The interest rate patterns that have been in place for quite a while shifted noticeably at the end of January and continue to shift. Interest rates likely have already bottomed for this quarter and rates are forecast to rise gradually over the forecast horizon from here.
