Bond Market Commentary

Discipline Despite the Market “Never-Befores”

By Doug Drabik
July 15, 2019

We often talk about how difficult predicting can be, even for the financial industry experts. Today’s markets have many influencing variables from the traditional economic releases and transforming population dynamics to the more recent global influences. Perhaps one of the greatest modern day market influences are the world’s central banks.

The U.S. central bank is known as the Federal Reserve Bank or the Fed for short. It has been in existence a little over 100 years, deriving its authority from the Congress of the United States in 1913. In general, the Fed manages monetary policy, currency, money supply and interest rates. They are independent in a structure designed to keep separate from political intrusions or pressures; however, the Federal Reserve serves the government and its people and works very closely with the Department of Treasury. The Department of Treasury, established in 1789, serves to collect taxes, manage government revenues, promote growth, stability and ensure safety. It is important to understand that the Fed is a nonprofit entity. After all expenses are paid, Fed profits go to the Department of Treasury who uses these profits to fund government spending.

When the Fed purchases government debt, they don’t pay for it with cash. They replace the debt by crediting Federal Reserve member banks that hold Treasuries and that credit is treated as if it were cash. The member banks are subject to hold a certain reserve requirement which is a level the Fed can manipulate to increase or decrease money available to lend out. Excess reserves held by the member banks are available for business and consumer loans which theoretically promotes growth and spending to boost the economy. This process can also increase inflation.

Never before have  world central banks increased the money supply to the extent they have through large open market purchasing programs or quantitative easing (QE). As shown by the graph, these four major central banks have increased their balance sheets to nearly $20 trillion. The process should theoretically have spurred economic growth and increased inflation, yet the world’s nations report that inflation has remained muted. This may explain that excess reserves have never really created the economic prosperity they were targeted for but instead supported robust bond and stock market growth. It could be reasoned that as long as the central banks continue with this monetary easing activity, low interest rates will endure.

Avoid the temptation to predict interest rates. Fixed income can be an easy discipline in that predictable cash flow and income can be defined even in a financial world of never-befores. The key is staying disciplined with portfolio allocations despite the market noise.

To learn more about the risks and rewards of investing in fixed income, please access the Securities Industry and Financial Markets Association’s “Learn More” section of, FINRA’s “Smart Bond Investing” section of, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) “Education Center” section of

The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.