In Short: 3% is noteworthy but it’s not signaling a spike


Federated’s duration committee today trimmed its tactical short position for fixed-income portfolios.

The move was driven primarily by technical factors led by the 10-year Treasury’s break above 3% this week and a 23 basis-point increase in the broader U.S. Treasury Index in the three weeks since the duration committee last met. Yields are now trading above the highs of their two-month trading range. The committee does think further increases in yields could confront resistance. Deterrents include the equity market's negative reaction to the breach of 3% on the 10-year, the apparent loss of growth momentum in other developed countries and ever-present event risks (geopolitics, trade, presidential tweets, etc.).

That said, the duration call is being kept short of neutral as the committee still sees the bias on rates as higher for four reasons: 1) expectations inflation will continue to rise toward the Fed’s 2% target; 2) strengthening U.S growth despite an anticipated weaker first-quarter GDP print this week (the initial Q1 GDP estimate is due Friday); 3) the likelihood for two and possibly three more rate hikes this year from a “gradualist” Fed; and 4) rising fiscal deficits in the wake of tax cuts and spending increases.

R.J. Gallo
R.J. Gallo, CFA
Senior Portfolio Manager, Head of Municipal Bond Investment Group, Head of Duration Committee

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