In Short: We still think the bias on Treasury yields is upward


Federated’s fixed-income duration committee has voted to remain short duration for much the same reasons as we did last month: U.S. and global growth have improved, financial conditions are stimulative, the Fed and European Central Bank (ECB) remain on track to reduce extraordinary monetary stimulus and tax cuts appear likely later this fall or early next year.

That said, there are some noteworthy near-term hurdles. Washington faces a September showdown over the budget and increasing the debt ceiling, which may create market volatility. We believe the devastation from Hurricane Harvey could help Congress avoid a government shutdown in order to keep FEMA and flood insurance funds flowing to Texas and Louisiana. House conservatives may demand spending restraint in exchange for increasing the debt ceiling and some political deal-making may be required. Yet, we expect the ceiling will be raised without long-lasting negative consequences. 

Looking beyond the next month, inflation here and abroad remains too low, reinforcing caution at the Fed and ECB and likely limiting the degree to which Treasury yields rise. But as outlined above, we continue to think the macro arguments favor an uptrend over a downtrend.