The markets reached noteworthy extremes last week, with 10-year rates testing meaningful support at the 4.15% level before retracing to 4.30%. At the same time, equities continued to sell off, with the S&P 500 falling to 5666 (representing an over 7% decline over the past several weeks) before rebounding to 5770. Increased concerns about a significant economic slowdown have driven the market action of late, including some forecasts for negative GDP growth. President Trump’s stance on tariffs aimed at Mexico, Canada, and China, along with the expectation of retaliatory tariffs on other trade partners, has business owners indicating the policies will have a negative impact on their business forecasts. Given all the developments, the potential for a 10% correction to the equity market is well within reach, equating to 5532 on the S&P 500.
Market volatility has been extremely high, and given the general distaste for uncertainty, the ever-shifting narrative regarding President Trump’s tariff policies is throwing fuel on the fire of unpredictability regarding the next shoe to drop. Geopolitical developments, including the War in Ukraine and overseas economic disruptions, such as the fiscal about-face from Germany announcing a 500 billion Euro special investment fund, have contributed to the state-side volatility.
At one point during the week, Fed Funds Futures priced three full rate cuts for the year, which has since adjusted to just over two cuts. On Friday, Chair Powell reiterated that the Fed does not need to be in a hurry to react and stated that the economy “continues to be in a good place.” Along with my concerns about a reflationary environment and the Fed’s stated patient policy approach, I expect interest rates to revisit the higher yields tested earlier this year.
The municipal market was much less volatile than Treasuries but ended the week around 5-10 bps higher across the curve. As we head closer to the April 15th tax deadline, municipals are expected to cheapen, and ratios will rise. Supply/Demand factors are likely to shift with 30-day visible supply increasing to above $17 billion and the lightest redemption period altering buy-side activity over the next several weeks. As a precursor, negotiated deals had a more difficult time getting priced last week. Furthermore, traders indicated that bid/offer spreads widened, and secondary activity was notably slower. Rate volatility, lower absolute yields, and diminished reinvestment dollars were likely all contributing factors to the more muted market activity.
Ratios
2-Yr 64%
3-Yr 65%
5-Yr 66%
10-Yr 69%
30-Yr 88%