Investors Flock to Safety of Treasurys Amid Political Uncertainty

US stocks are trading sideways today while Treasurys are better bid across the curve as investors seek fresh economic growth catalysts following Friday’s mixed jobs report.  Based on market reaction, the general takeaway from the report was that underwhelming wage growth (despite the strong headline jobs number) does little to raise the Fed’s level of urgency for a near term rate hike.  Uncertainty over some of President Trump’s policies also may contribute to the Fed’s perceived lack of urgency, but the release of the Fed minutes later this month and Yellen’s semi-annual Humphrey-Hawkins testimony to Congress on 2/14-15 should provide more visibility into the committee’s thinking.  Futures currently imply only a 24% chance of a rate hike at the March meeting despite SF Fed President Williams (2017 non-voting member) saying that an argument could be made to raise rates when the FOMC meets next.  He still considers three rate increases for 2017 “a reasonable guess”, which would seem aggressive if the Fed holds off on a first hike until June. 

Political uncertainty in France also contributed to the global bid for safer assets.  Marine Le Pen, leader of France’s far right National Front Party, declared her candidacy for president, and is expected to run a “France-first”, anti-globalization campaign.  If elected, Le Pen pledged to withdraw France from the EU, which investors believe would be far more complicated than the departure Britain is about to begin negotiating.  As part of the withdrawal, Le Pen would replace the euro with a basket of new national currencies.  Ratings agency S&P already warned that France would default on its sovereign debt under Le Pen’s plan.  The difference in yields between French and German bonds is now the largest in almost four years as a result. 

The US data calendar is light this week (with no meaningful data today), so investors will keep an eye on political developments and comments from Fed officials following Friday’s jobs data.  All three major US stock indexes are down close to 0.25%, while Treasury yields and swap rates are 3-6 bps lower across all major maturities, with the largest move in the belly of the curve.