Fixed Income Market Summary: April-May 2014
- Economic data has continued to be positive since the end of the first quarter. Job growth was steady for both April and May, manufacturing continues to improve, and wages are growing very slowly.
- The Fed continues to be on pace for ending the Quantitative Easing (QE) purchases (but not necessarily selling the current holdings) at its October meeting. Given the most recent data and market reaction, it would take a very significant slowdown to derail the process at this point.
- The positive domestic news should have pushed rates on a path higher, but the opposite has been true for most of the quarter. The bellwether 10 Year yield is actually down 25 basis points since the end of the quarter. This appears to be at least in part attributable to the diminishing issuance by the Treasury as the budget deficit continues to shrink.
- The European Central Bank (ECB) took a “kitchen sink” approach in early June, including cutting the overnight rate (rate paid by the ECB to banks for holding reserves overnight) to -0.1%. While this is designed to encourage lending (having to pay the ECB to hold cash), the regulators are still demanding an increase in reserves for many of the member banks.
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