In Short: Run-up in yields prompts a smaller short on duration

09-29-2017

Federated’s fixed-income duration committee voted today to pare a few ticks off its short duration call, in large part as a result of the past month’s roughly 30 basis-point increase in the 10-year Treasury yield. We still believe the bias on long rates is up, given favorable underlying U.S. and global growth trends, prospects for meaningful tax reform, buoyant risk-asset markets and the Fed’s commitment to gradual normalization. That said, as this morning’s report on PCE inflation showed, inflation continues to come in below expectations and the route to tax cuts is sure to be contentious and circuitous. This, when combined with the Fed’s new, lower terminal rate, should act to limit upward moves on long yields from current levels. As a result, the committee voted to raise duration for fixed-income portfolio models to a moderate short position.