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What Will Happen if the Federal Reserve Unexpectedly Hikes Interest Rates Fearing That it May be Falling Behind the Proverbial Curve?

Since August 2014 I have been opining about the illiquidity of the bond market, a liquidity event I believe is the result of regulatory changes.  Many times I have commented it could be ugly when selling commences under the simple guise ifeveryone already owns something who is left to buy when selling starts, a scenario amplified by a lack of liquidity.

According to Bloomberg, Monday Treasuries suffered their biggest drop in price in two years.  This was not cathartic selling typically associated with a market bottom for Bloomberg writes volume Monday was about 14.4% lower than average daily volume in April.

The lack of volume is not a one off event.  ICAP writes Treasury volume at Wall Street’s biggest bond dealers had their worst April in six years.  Corporate bond trading slumped 14% in April compared to the same month in 2014.

The decimation and lack of volume is not just isolated to Treasuries.  Global bonds have lost about $456.4 billion of value in about three weeks on lack luster volume.  Perhaps the ten year German debt has been crushed the most rising to a 0.7% yield from a 0.08% yield one month ago.

Wow!  I rhetorically ask what will happen if the Federal Reserve unexpectedly hikes interest rates fearing that it may be falling behind the proverbial curve?  Commodity and home prices are rising at a pace few suggested as little as two months ago.

Speaking of inflation, import prices are released today as are retail sales.  Has the rising price of oil impacted the consumer?  Most, including me, thought sales would rise because of oil’s plunge.  As the data has suggested, sales remained lack luster.  Will the rise in oil now be a nonevent as it relates to the consumer?

Markets are fascinating as markets are people and people move markets and the significance of each event changes on a daily basis.

Last night the foreign markets were up.  London was up 0.28%, Paris up 0.97% and Frankfurt up 0.47%.  Japan was up 0.71% and Hang Sang down 0.58%.

The Dow should open quietly higher ahead of retail sales.  As questioned above, has the rise in crude affected sales and or prices?  The answer can impact the direction of both the fixed income and equity markets.  The 10-year is up 7/32 to yield 2.23%.


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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.