August 2, 2016. By John Wolfsberg:
The market seemed to have regained its appetite for risk assets as we entered the second quarter. Oil prices had recovered from the multiyear lows of the first quarter, and investors began to feel confident that the economy would improve and interest rates would begin to finally increase. The “Brexit” vote (the UK referendum on whether the country should leave the European Union) scheduled for late June was widely expected to be in favor of staying.
As June progressed the markets grew nervous and a flight to quality slowly moved rates lower. Labor figures and other economic releases suggested the domestic economy was slowing. Brexit polls in the UK suggested that a vote to leave was more of a possibility than originally thought. The flight to quality accelerated on June 23rd when the Brexit vote surprised the market with a win for the “Exit” camp, and investors’ concern over the global economy peaked. As a result of June’s economic releases and events, 10 Year Treasury yields (which had opened the quarter at 1.79%) dropped 30bps to 1.49% to close out the quarter. In fact, bonds across virtually every sector rallied for the quarter as investors bid up prices in a search for yield.
While concerns remained, within a few days investors realized that the exit process could take as long as two years, and concurrently the market began to stabilize. For more commentary and analysis on the fixed income markets, please take a moment to read our complete thoughts: Second Quarter Fixed Income Review, 2016.