Introduction
Perhaps with a little bit of the luck of the Irish, we will get a reprieve from the volatility and drama that has defined the markets of late… but I’m not counting on it. Interest rates drifted higher after creating a new low the week prior, and equities continued to fall, albeit with a little bounce off the lows at the end of the week. Concerns about a painful decline in the health of the economy resulting from the Trump administration’s policy on tariffs continue to be the primary driver of price action. Notably, Thursday evening, Senator Schumer indicated that he plans to vote to keep the government open, avoiding a shutdown – this largely contributed to a sense of relief for equities on Friday.
The S&P 500 index reached technical correction territory on a closing basis on Thursday of last week, representing a slightly greater than 10% decline from the February peak to close at 5504. A bounce from this level, as occurred on Friday, is not unexpected, but the underlying theme that businesses may struggle going forward and earnings will be impacted remains a concern. Given this dynamic, it is difficult to suggest with any certainty that we’ve reached a bottom in equities. February’s CPI and PPI data suggest that core-PCE may come in at a rounded upwards of 0.4%, suggesting inflation concerns remain despite headlines focusing on the economy's strength. For this reason, I continue to believe that the longer-term inflation narrative will eventually add its influence to the market, and interest rates can revisit highs from earlier this year. Fed rate cut estimates have varied widely as expectations that the economic stimulus will have to be enacted. Still, I remain on the lighter side of such expectations, with only a single Fed rate cut for the remainder of the year. Interest rates remain firmly range-bound, spending much of the week slightly above the 4.25% level.
Thoughts from the Trading Desk (with contributions from Ryan Riffe):
It is difficult to point a finger at one contributing factor to this week's carnage in the municipal market with underperformance as rates backed up as much as 20 basis points on the longer end of the curve. Heading into the month, we knew technical factors would be challenged given the increase in supply and quick decline in reinvestment capital. The negative backdrop of tax policy and economic uncertainty has added fuel to the fire. To make matters more challenging, the market is in the doldrums of tax season. Year to date, municipals managed to weather the volatility storm observed in the Treasury market; however, like most things, this eventually had to end. For the first time this year, negotiated deals struggled to be placed. Not only were syndicates left with balances for both competitive and negotiated deals, but some loans were sidelined due to lack of demand. This could be a reset for the market as Muni/US Treasury ratios are now at their most attractive levels in quite some time. Although entry points began to suggest opportunity, we believe volatility will persist until a clearer path is defined, given the previously mentioned challenges for financial markets across the board.
Total New Issue Supply: approx. $10.56 billion
2-Yr Ratio 66%
3-Yr Ratio 68%
5-Yr Ratio 69%
10-Yr Ratio 72%
30-Yr Ratio 92%
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
The Bloomberg Barclays Global Aggregate Negative Yielding Debt Market Value Index represents the portion of the Bloomberg Barclays Global Aggregate Index that measures the aggregate value of global debt with a negative yield. • The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization. • The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.• The Cboe Volatility Index® (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of weekly S&P 500® Index (SPX) call and put options with a range of 23 to 37 days to expiration.• The ICE BofA MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of implied volatilities on the CT2 (Current 2 Year Government Note), CT5 (Current 5 Year Government Note), CT10 (Current 10 Year Government Note), and CT30 (Current 30 Year Government Note), with weights 0.2/0.2/0.4/0.2 respectively.• The Markit CDX North America Investment Grade Index is composed of 125 equally weighted credit default swaps on investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Tele-communications. Markit CDX indices roll every 6 months in March & September. • The Markit CDX North America High Yield Index is composed of 100 non-investment grade entities, distributed among 2 sub-indices: B, BB. All entities are domiciled in North America. Markit CDX indices roll every 6 months in March & September. • The U.S. Dollar Index (USDX) indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. Intercontinental Exchange (ICE) US computes this by using the rates supplied by some 500 banks.
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