The Weekly Update

Over the week 10-year US yields saw another 13 bps decline in yields, closing on Friday at 1.77%, with US Treasuries recording the best start to a year since 2008. Treasuries were boosted by dovish comments from Janet Yellen and concerns about a weak global economy which offset an otherwise respectable jobs report on Friday.

After a couple weeks of hawkish comments from Fed members, a cautious approach in adjusting policy was the theme of Janet Yellen’s speech which she delivered at the Economic Club of New York last week. She highlighted that a cautious stance is “warranted because, with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric”. She noted that domestic inflation is “somewhat more uncertain” adding that although there have been signs of pick-up, US economic indicators remain “somewhat mixed”. These comments reinforce Yellen’s comment a couple of weeks ago which indicated she is unconvinced by the strength in the core PCE data of late stating, "I haven't concluded that we have seen any significant uptick that will be lasting."

With increasing global uncertainty, Yellen even discussed the central bank’s “considerable scope” to ease if the economy falters, “we used them effectively to strengthen the recovery from the Great Recession” and would do so again, adding that “only a modest degree of additional stimulus” can be provided.

In contrast, Friday’s non-farm payroll data showed another month of solid job gains: the US economy added 215,000 jobs in March slightly ahead of expectations. Average hourly earnings edged up to 2.3% yoy from the prior reading of 2.2% while average hours worked was unchanged from the prior month’s figure of 34.4 hours.

It came as little surprise to us that the FOMC has recently scaled back its 'dot plot' to two rate rises from four in 2016, although even this still looks optimistic. The FOMC’s forecasts are based on the assumption that ‘economic headwinds’ will fade and a gradual increase in the neutral rate will then be required.

Nevertheless, US growth remains patchy and uneven; aside from the obvious weakness in the manufacturing sector, US real median household income has declined since 2007 reflecting rising income inequality and ‘external conditions’ have been unsupportive. Added to which we have the issue of declining working-age populations in many developed and some developing economies (notably China) which will act as a significant headwind to global economic growth in the decades ahead.

This implies the Fed can afford to be 'patient' in raising rates.  Downward revisions to the US’s potential output growth combined with ‘external headwinds’ and a Fed acting ‘ahead of the curve’ should support Treasuries at the long end. This should also boost demand for high quality quasi-sovereign issues from 'wealthy nations', which still offer a generous spread over Treasuries.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.