MRM Commentary


Monthly Investment Commentary

APRIL 2019

    Economic Update

    The general tone in risk markets improved notably in Q1 2019, but cracks in this bullishness began to surface toward the end of March. A sharp decline in Treasury yields began immediately following the March 20 FOMC meeting, which was more dovish than expected, and weaker global economic data and geopolitical concerns further fueled an increase in Treasury prices and implied rate volatility in the ensuing days. Additionally, the 3-month/10-year Treasury yield spread inverted for the first time since mid-2007. On the data front, preliminary readings on March manufacturing PMI data from Europe were much weaker than expected, particularly for Germany, and U.S. data for both services and manufacturing came in below expectations. The U.S. manufacturing reading was the lowest since June 2017, and the March decline in the service sector survey erased much of the gains from the prior two months. Geopolitical risks from Brexit have also contributed to a bullish tone in Treasuries, creating a snowball effect.

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    MRM Portfolio

    The Move in Treasuries
    The move in Treasuries was not mirrored in risk markets. U.S. equities were slightly higher amid the bond rally and credit spreads were only modestly wider (investment-grade credit spreads actually tightened). Nevertheless, a sharp move in government bond yields for less than obvious reasons raises questions in broad markets of whether bond investors are pricing for a larger paradigm shift. While the front-end of the yield curve (2yr-5yr) has been inverted for much of the last four months, the 3-month/10-year inversion sparked fresh concerns of what the move may be signaling. Most market participants are well aware of the correlation between curve inversion and recession risks.

    Risks Diminished

    Another driver of the strong market performance was the widespread reduction in major risks to markets. Here in the U.S., we avoided a second government shutdown in as many months by passing a bipartisan funding bill by the February 15 deadline. We also saw progress on trade negotiations with China, with the U.S. putting a stop to scheduled tariff increases while negotiations continued. Any positive news here would be a boon for markets.

    The Policy Pivot

    Perhaps the greatest catalyst for the rebound in market sentiment in 2019 has been the Fed’s policy pivot that began in early January. Just one month before, Fed leaders were defiant in the face of heightened market volatility and much external criticism, particularly from the White House. At the December meeting, the FOMC raised the fed funds rate and, more importantly, maintained its guidance for continued rate hikes in 2019 and beyond. Equity markets deteriorated further before the FOMC capitulated in January and began using the word “patience” with regards to future policy decisions.

    Yield Curve Inversion

    There has been more market focus in recent days/weeks on yield curve inversion, as participants attempt to interpret the implications of the change in rates and curve slope. The 3-month/10-year inversion was widely noted, but another important measure of curve slope highlighted in the last year by Fed staff members was also noteworthy. In June 2018, Eric Engstrom and Steven Sharpe of the New York Fed wrote an article titled “(Don’t Fear) The Yield Curve,” in which they discounted the usefulness of far-term yield spreads, such as the 2-year/10-year spread, at gauging market expectations for Fed policy and, consequently, the high historical correlation of inverted yield curves and recessions. Alternatively, the article opined that a “near-term forward spread” was more intuitive choice in assessing these factors, and the metric used was a 3-month Treasury bill.


    As we look out and try to examine the current environment, there certainly are risks. The most meaningful would be the result of the U.S.-China trade talks. Our stance has been that we expect positives over the intermediate term. However, if the current talks fall apart or a solid agreement that, among other things, removes U.S. tariffs does not come to fruition, then there would likely be downside risk in the stock market. At MRM we are very vigilant.

    Source: ALM FIRST

    MRM model holdings as of March 31, 2019



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