BNY Mellon Weekly Fixed Income Market Commentary

Sweating the Small Stuff

We are back to a will they stay or will they go market, where the main focus is on the upcoming June Fed meeting. As the lyrics go, “if they go there will be trouble, and if they stay it will be double”. Thus lies the narrative as to whether the market is being overly cavalier in assigning almost zero odds to the probability of a June rate hike. While FX volatility has increased recently, the futures and rates markets have been fairly steadfast in discounting the Fed’s willingness to raise rates in June. As the chart below indicates, the odds of a June hike have steadily declined over the past few months, with major inflection points after the March & April FOMC meetings, the 1Q:16 GDP report and last week’s non-farm report. We suppose we take odds (pun intended) with the concept that investors are being overly complacent about the possibility of a Fed rate hike. As the chart indicates, the possibility was as high as 45% at the beginning of March, but came to its current level through the splicing of recent Fed policy statements, the corresponding minutes and the state of the US and global economies. For the record we are with the majority regarding a June rate hike, although our September call presently appears in the minority with only 30% odds of a hike occurring at that meeting.

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