Fed Rate Hike

It’s always pretty hard to see the future, but especially for FI CEFs just now.  Although the market is set up to likely provide some important signals soon.  Two sides:

1. The old narrative prevails.  Fed still plans to hike rates in Dec and 3-4 times in 2019.  Credit spreads will widen, rates across the curve will rise, the 10yr will head for 3.5++. AND FOLLOWING THE WEEKLY MACDS, FI CEFs will set new lows, worst case being a revisit of late 2015 lows — back when we first assessed the possibility that precisely what is happening now would occur.  This last worst case possibility is really concerning because it implies losees much greater than those we’ve already seen from recent highs.

2.  The very new narrative prevails.  The most recent — and far less hawkish — pronouncements by Powell and VC Clarida are adopted by the market.  ANY tighening in 2019 becomes a more difficult decision because a data dependent Fed will see evidence of a rapidly cooling economy and stable inflation.  Stopping momentum in its tracks, FI CEFs start to recover near the recent lows, strongly suggesting a new trading range has been established OR, in the most bullish view, they have tentatively started a pattern of higher lows.  Sadly, this possible outcome is further challenged simply by recent market dynamics and the calendar:  many FI CEFs are very efficient targets for tax loss selling, which tends to be relatively price-insensitive.