March 31, 2017

Treasury yields are likely to remain range-bound in the near-term as investors assess the timing of any fiscal stimulus and await the outcome of elections in France.  However, over the course of the second quarter, we expect interest rates to resume the upward trajectory that began last year.  Employment is at the Federal Reserve’s target and inflation is nearing the Fed’s goal.  Therefore, the Fed has communicated that they intend to continue raising the Federal Funds target and they have discussed ceasing reinvesting maturities from the balance sheet, which would put further upward pressure on yields.  Accordingly, we remain defensively positioned with a duration in our Clients’ bond portfolios that is approximately 15% shorter than the bond indices.  While the yield differential, or spread, between corporate and Treasury bonds has narrowed to be slightly below historical averages, we continue to favor high quality intermediate corporate bonds.  Profits have rebounded and investors continue to seek out incremental yield in the low interest rate environment, which should provide support to maintain the current corporate bond spread.  Turning to the municipal market, strong inflows in the first quarter caused the ratio of AAA-rated municipal bonds relative to their Treasury counterparts for most maturities to compress.  Longer maturity municipal yields are at a premium to Treasury yields, which likely reflects uncertainty about tax reform and the impact it may have on demand for tax-advantaged bonds.  Investors in high income tax brackets should continue to favor high quality municipal bonds as reductions in individual tax brackets are likely to be modest and we believe the exemption of interest received on municipal bonds will be retained.