Treasury ETFs Rally On Falling Inflation Expectation
Zacks Investment Research | Jul 23, 2017 10:50PM ET
The stock market is enjoying all-time highs no doubt, but the simultaneous rally in the fixed income market is also worth noting. This phenomenon is not common as both the stock and fixed income markets are inversely correlated to each other. This is because risk-on trade sent the stocks higher while risk-off pushed bonds higher.
Hopes of strong earnings and a dovish Fed triggered a rally in the global stocks while at the same time growing Washington turmoil and muted inflation took investors to safety. U.S. consumer price remained flat in June against the expectation of a 0.2% increase, signaling doubts over the third rate hike this year. This represents year-over year growth of 1.6%, the smallest gain since October 2016, after a rise of 1.9% in May.
In her latest testimony, Fed Chair Janet Yellen stated that she is not in a rush to raise interest rates given lower inflationary pressure. It will continue to follow a gradual rate hike plan and unwinding of its massive balance sheet. Per the central bank, the interest rates are close to the neutral level – a level that neither encourages nor discourages economic activity. The current target for the funds rate is 1-1.25% while inflation is around 1.4%, implying that the real rate close to zero, according to Original post
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