The bond market continues to suffer from the consistent selling pressure that commenced last fall. The rate rise has not been limited to the government bond market. Municipal bonds, Investment grade corporate notes and high yield bonds have all suffered losses. The price of the $35 billion Blackrock I-shares investment grade bond ETF (LQD), the vehicle many investment advisors utilize for their fixed income exposure, is down -9.25% year-to-date. Similarly, PIMCO’s MINT is down -0.79% and Blackrock’s NEAR is down -0.65% year-to-date. As with LQD, both are frequently used by investment managers as an alternative to holding cash.

So…What a quiet week in the capital markets! As of now, bond yields have drifted higher and the yield curve flatter as investors contemplate the Fed’s upcoming rate hikes. Since last Friday the 2 year US Treasury Note yield has risen 14 basis points to round out the week at 1.61%, while the yield to maturity on the 10 year US Treasury Note rose 6bps to close Friday out at 1.99%. Stocks, as measured by the S&P500, rose for the week – closing around 60bps higher. Let’s digest that for a minute. Wait, Russia invaded the Ukraine on Thursday. Putin made his motive clear – demilitarize the Ukraine. The shock that move sent through the capital markets found the S&P down nearly 3% that day making its peak to trough (from Jan 4th high) down 14%. Safe haven assets rose – gold, and US Treasury Bond prices in particular. The money market space removed much of the probability of a 50bps move higher in fed funds. World leaders responded with sanctions and the Ukraine is fighting back. Apparently, that was enough for risk assets to rebound and put Putin’s actions in the review mirror. The S&P500 is up more than 6% from the low print this week.

The biggest surprise this week wasn’t the shocking 7.5% rise in the Consumer Price Index over the last 12 months; although that was certainly an unpleasant surprise. Instead, the surprise is how quiet the markets are finishing the week. On the back of the outsized CPI, traders began to “whisper” that the Fed would preemptively raise rates Friday morning at 8:00 a.m. Validating that speculation, St. Louis Fed President Bullard was quoted as saying that he supported a 50 basis point rate hike in March and would like to see the Fed Funds rate 100 basis points higher by June. One would expect that prior to making such a bold forecast he would have had a conversation with the Chairman so as to not send a misleading message to the markets. With that in mind the markets took his message seriously, with the two-year note 20 basis points higher and the S&P 500 nearly 90 points lower on the day. We arrived at our desks prepared for a day of carnage on Friday morning, only to find a the Fed said that the Central Bank doesn’t favor a half point hike or an emergency move. Apparently, Bullard didn’t have the blessing of the Chairman to make such a statement?

As economist debate the message Chairman Powell delivered to investors on Wednesday, the fact remains that the Fed continues to pursue emergency monetary policy. For evidence, one need look no further than the bi-weekly System Open Market Account Holdings report that was released this past Wednesday. The report, essentially the Fed’s balance sheet, has swelled to $8.3 trillion, up from $7.74 Trillion on September 1st.

For the second month in a row the employment reports told two conflicting stories. The establishment survey came in at less than half of consensus expectation at 199,000 new jobs, while the household measure registered 651,000 new jobs in the month. That measure was enough to push the unemployment rate down to 3.9%, and within a “chip shot” of the post financial crisis low of 3.5%.  That comes on the back of the surprisingly hawkish minutes of the December 15th Fed meeting. Not only did the minutes solidly indicate a March liftoff in Fed Funds, the committee apparently had a meaningful discussion on the appropriate size of the Fed balance sheet under normal circumstances and how fast they would allow a runoff of maturing securities.