March 2015 Monthly Commentary
The Fixed Income markets were hampered by weakness in the municipal bond market, as bonds issued by Illinois and Chicago came under selling pressure due to pre-mayoral election jitters and by the seasonal uptick in new issue supply. The concern was that Mayor Rham Emanuel was at risk of losing to the Cook County Commissioner, Jesus Garcia. Investors anticipated that if Garcia were to be elected Mayor, he would cave to union pension and compensation demands and would, thereby, worsen Chicago’s already stressed financial situation. In short, investors feared the city would ultimately go the way of Detroit. While Emanuel certainly cannot be described as a fiscal conservative, since taking the job of Mayor, he’s taken steps to stabilize the city’s shaky finances. The worry was for naught as Mayor Emmanuel was elected for another four year term. With that, the price of City of Chicago and State of Illinois bonds have rallied somewhat.
The bond market continued to suffer heightened volatility, with the 30-year bond plunging more than five points early in the month, followed by an eight point bounce before settling a little more than a point higher for the period. The heightened volatility has become a source of concern for investors. With the Volker rule sharply curtailing trading desk activity among money center banks, large trades are causing outsized moves. The result has been wild price swings across the yield curve.
The first week of March witnessed two monumental changes in finance; the removal of AT&T from the Dow Jones Industrial Index, and the usurpation of bank supervision by the Board of Governors of the Federal Reserve Board. Dow Jones’ removal means that AT&T will not be part of the index for the first time since 1938. The guardians of the index concluded that Apple better represented a blue chip company than AT&T. The move is inconsequential, as the Dow Jones has long been overshadowed by the broader Standard & Poors 500 Index as a gauge of market performance.
The second change is monumental. The Federal Reserve Bank of New York Fed has long held supervisory oversight over money center banks. Since the financial crisis, the New York Fed has been under criticism for cronyism with the management of those banks. The criticism reached a crescendo several months ago when a former Fed employee produced recordings of senior management directing her to ignore questionable polices that she had discovered at Goldman Sachs. Bill Dudley, the current President of the New York Fed, and former Goldman partner, was grilled by Congress where it was suggested there is a “culture problem” at the Fed. One Senator went so far as to say “either you need to fix it, Mr. Dudley, or we need to get someone who will.” Apparently, the Board of Governors agreed because the change was made without public discussion. We interpret the move as a toughening of oversight and comes on the back of already onerous oversight. For now, the New York Fed will continue oversee monetary policy through the Open Market Desk, but there is speculation that may change as well.