The ever-shifting dynamic of the global tariff situation created massive moves in the markets last week, adding to the prior week’s volatility. Equities sold off before recovering but tested -20% bear...
The ever-shifting dynamic of the global tariff situation created massive moves in the markets last week, adding to the prior week’s volatility. Equities sold off before recovering but tested -20% bear market territory. Rates were hammered all week rising from 3.88% to reach nearly 4.60 midday on Friday. Notably, Treasuries suffered the worst weekly loss since 2019. Turmoil in the credit market drove President Trump to initiate a 90-day pause on tariffs. Trump and his administration had previously voiced a willingness to accept some pain in the equity markets, but when it came to the brute force of the bond market flexing its muscles, he could no longer stay the course. Concerns about a loss of confidence in US policy led to worry about the safe-haven nature of US investments, particularly Treasuries. The combination of foreign investors liquidating Treasury positions along with the unwinding of leveraged trades and investors moving to the sidelines amongst the tumult all contributed to the aggressive rise in yields.
The mid-week relief rally in the equity market following the 90-day pause in tariffs was short-lived. Tariff, economic, and market uncertainty remain major concerns that keep the level of uncertainty elevated, providing little relief for investors. Ultimately, however, S&P 500 performance for the week was positive. Caution is warranted, however, as equities could easily resume their slide with economic uncertainty and growth prospects remaining elevated. The previous week’s employment data and last week’s PPI and CPI releases were virtually ignored by the market as tariff headlines dominated. Inflation data, particularly PPI, came in much softer than expected suggesting inflation concerns are limited. However, the lagging nature of the data fails to capture the current trade war environment. Additionally, University of Michigan Sentiment data continued its downward trajectory indicating consumers have become increasingly concerned about economic growth. Also, the University of Michigan's year-ahead inflation expectations rose from 5.0% to 6.7%. Ultimately, inflationary pressures are expected to increase driving yields higher as I anticipate the 4.80% level achieved earlier this on 10-Yr UST will be eclipsed. Furthermore, the Fed will be hard-pressed to cut rates as inflationary pressures mount.
From the Municipal Desk (with contributions from Ryan Riffe):
Volatility in the municipal market spiked causing yields to rise to levels not seen in over a decade. Monday through Wednesday the AAA MMD curve hiked its yields anywhere from 85 to 97 basis points. The most severe adjustments were on the front end with maturities ranging from 1-5 years. ETF and Muni Funds were forced sellers throughout the first half of the week, then again on Friday. The volatility and uncertainty seen in the equity market spilled over to tax-exempts at a time when demand remains light, causing an amplification of the sell-off. Most new issue deals had to be sidelined. Secondary market activity on Wednesday was defined as; “If you bid it, you bought it.” Much of the week’s trading dynamic mirrored the days of Covid defined by a liquidity squeeze with little to no support. Thursday offered a moment of reprieve as Munis followed the rebound in equities and saw upwards of 48 basis points of bumps (MMD Yield decline). There has been a clear dislocation between Municipals and US Treasuries. This was evident as the Muni/UST 30-YR Ratio touched over 100% on Wednesday. Essentially, Tax-Free absolute yields on a AAA debt were above the yield on the 30-year US Treasury bond. Thursday's rebound was short-lived as the market sold off more than 25 basis points across the curve on Friday. We believe volatility and dislocation will continue until there is more clarity regarding economic and political policy.
Ratios:
5-YR UST/Muni Ratio @ 81%
10-YR UST/Muni Ratio @ 82%
30-YR UST/Muni Ratio @ 95%
30 Day Visible Supply @ $20.7 Billion*
*Many deals were postponed and remain 'Day-to-Day'*
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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