In 2018, a strong labor market and tax cut-fueled business investment drove GDP to its strongest back-to-back quarterly performance since 2014. Fed officials, witnessing the surge in growth, seized the opportunity to continue “normalizing” monetary policy.

After raising the overnight target rate by a total of 75 basis points in 2017, the Fed was even more aggressive in 2018, hiking short-term interest rates four times in quarter-point increments. At year end, the overnight fed funds rate stood at a range of 2.25% to 2.50%.

The run-up in bond market yields was significant. In a 12-month period beginning in early September 2017, the two-year Treasury-note yield more than doubled from a low of 1.26% to 2.71%. The two-year yield peaked at 2.97% in early November 2018, the highest in over a decade. Unlike the previous year, the anticipated Fed hikes were mostly priced into the market, which meant investors had been compensated up front for those increases.

As the fourth quarter began, the trade war with China worsened and the threat that an agreement would not be reached began to drag on both confidence and spending. Volatility was reintroduced to the equity markets and the year’s gains began to evaporate. The broad market S&P 500 index, which reached a fresh record high of 2,930 in mid-September, had surrendered all of its gains three months later. As investors took refuge in the bond market, bond yields retreated in the fourth quarter.

In 2018, the most frequently applied management strategy for cash management clients was to gradually extend short durations when the yield curve was favorable, mitigating market exposure and accruing as much advantage as possible from the Fed’s rate tightening moves during the year. As the year drew to a close and it became apparent economic growth was slowing, extension trades made sense.

Significantly higher yields translated into higher earnings for clients and, like the previous year, interest in external management increased. In the first quarter of 2018 (the highpoint for most local government clients) assets under management topped $13 billion, a two-fold increase over a five-year period.


Hilltop Securities Asset Management, LLC, is an SEC-registered investment advisor focusing on local government operating funds, bond proceeds, debt service and reserve funds. Our philosophy is conservative with an emphasis on safety and liquidity. The investments are restricted to highly rated fixed income securities, predominantly including Treasuries, agencies, municipal bonds, and prime commercial paper. HSAM also offers arbitrage compliance services, including rebate and yield restriction compliance, post issuance written policies and procedures, private business use consulting and continuing professional education.