With a flip of the calendar, there was a new chair of the FED, volatility returned, new trade tariffs, a small U.S. government shutdown, a weaker U.S. dollar (-2% on DXY), and more high level White House personnel changes.

FED Chair Powell started off well in his congressional testimony. The FOMC raised rates by 25 bps at the March meeting. The market is pricing in at least 2 more rate hikes in 2018. U.S. economic data and global growth will determine how the FED moves. They expect inflation with the employment data, but are unsure on how the trade tariffs will ultimately play out.

The treasury curve was volatile with an overall flattening bias around a steepening spike as equity markets sold off in early February. Over the quarter, the 2/10 year curve flattened by 5 bps to 47 bps (with a spike to 78 bps). The longer 5/30 year curve flattened by 12 bps to 41 bps (with a spike to 61 bps).

All fixed income asset class returns were negative in the 1st quarter as measured by the Bloomberg Barclays Indices. Treasury Inflation Protected Securities (TIPS) led the returns contest at -0.83%. TIPS outperformed High Yield (HY) by 3 bps, U.S. Treasuries (T) by 35 bps, Securitized (ABS/CMBS/MBS) by 36 bps, and Investment Grade (IG) by 149 bps.

Credit spreads in High Yield (HY) and Investment Grade (IG) made lows early then widened and diverged as HY tracked equity markets while IG spreads were influenced by reduced foreign (especially Asian) buying on higher currency hedging costs, M&A issuance, and interest rate volatility. High Yield spreads hit the 2018 low of +311 bps on 1/26/18 before moving higher. Investment grade hit a low of +85 on 2/01/18 before going wider. Fears of higher inflation, rising long term rates, trade war, and tighter monetary (4th rate hike in 2018?) policy led to an equity sell-off and credit widening. Dealer inventories also increased and that weighed on spreads as markets were widened to find levels to attract buyers. High Yield spreads peaked at +369 (+58 bps from low) on 2/09/18 (after the DJIA -1,000 points). HY rallied with equities, but not back to January lows as concerns lingered. IG spreads continued to widen out slowly to +109 (+24 bps from low) as growth, supply, and fund flows kept markets unsettled. IG spreads found some traction when all in yield levels were around 4%.