The Federal Reserve (Fed) reassured markets that its rake hike pace would remain gradual with the release of its May 1–2 policy meeting minutes last Wednesday. While the minutes revealed a generally upbeat assessment of the economy consistent with Fed views since the start of the year, markets read the overall tone of the minutes as modestly dovish, helped by some context on the Fed’s additional emphasis that its 2% inflation target is “symmetrical.” The language has been widely used in the minutes and statement for some time, but garnered closer scrutiny after the policy statement added the phrase again in a key passa

Municipal bonds have held up well year to date, given the significant rise in interest rates across the yield curve, leading to expensive valuations by some measures. The Bloomberg Barclays Municipal Index has notched a total return of -0.9% year to date through May 24, 2018. The Bloomberg Barclays U.S. Aggregate Index, a broad proxy for high-quality bonds, returned -2.2% over that same period. Since early 2017, municipals have outperformed by even more, at 4.5% vs. 1.2%. This has richened municipals relative to Treasuries, as evidenced by quite low municipal-to-Treasury yield ratios [Figure 1] (the 10-year ratio has been below current levels

Emerging market debt (EMD) recently had a rough month, with the Bloomberg Barclays Emerging Markets Sovereign Index losing 3.3% from April 18–May 18, 2018. The index currently yields almost 6.2%, its highest level since early 2016, and the spread to comparable Treasuries has also increased back to mid-2016 levels near 3.1%, as shown in Figure 1. However, before we can determine if EMD represents an opportunity at current levels, it is important to look at the major causes of recent weakness, which include rising yields, a stronger dollar, and the continued potential for trade disruptions.

Rising Yields and Dol

The U.S. dollar has come back strongly. After losing nearly 10% in 2017 and an additional 4% in January, the U.S. Dollar Index has rallied more than 5% off of its February lows [Figure 1]. Gains have been driven by several factors, particularly rising U.S. interest rates, partially due to increasing Federal Reserve (Fed) rate hike expectations, and repatriation of overseas profits as prescribed by the new U.S. tax law. Weakness in emerging market (EM) currencies as a result of several flare-ups in trouble spots such as Turkey and Argentina, along with the populist wave in Italy, have added to support for the dollar. The dollar is important fo