It doesn’t take a genius to acknowledge that market sentiment has shifted significantly over the past several weeks. Interest rates created new YTD highs with 10-year UST testing the 4.66% (Pink) resistance area we have discussed for several weeks. Technical factors suggested that this occurrence was a distinct possibility, finally made possible with the accumulation of inflationary data, especially 3-months of higher CPI readings. As the chart below indicates, the upward-sloping trend channel (Green) is firmly intact and intersects the 4.66% resistance area, coinciding with this week’s push to that point. As expected, consolidation followed for the remainder of the week after testing and rejecting yields above this level.
The Iranian attacks on Israel provided a brief overnight flight-to-quality bid this week. However, the rally was short-lived. With the market’s attention on inflation, Fed-speak, and economic data, geopolitical risks have been less of a concern lately. The attacks reminded us that such events can occur anytime and warrant consideration for market-moving activity. So, where do we go from here? Based on the economic data and technical pressures, I expect to continue to see higher rates – with a good possibility of testing the October high of 5.02% (Yellow). There is little technical resistance above the 4.65% area until 10-year Treasuries near 4.93%; expect some buying support near 4.75% for purely psychological reasons. Following the recent move higher in rates, we can expect some consolidation of prices within the trend channel before rates extend further. Due to absent dovish comments from the Fed or weaker inflationary data, a complete reversal of the upward price trend has yet to be expected.
Unsurprisingly, municipals followed the general lead of the Treasury market, with yields higher by 5-7 basis points along the curve. SWBC clients participated in some activity selling into the strength as the market rebounded from the weakness on Tuesday. I view such actions as prudent as buyers should be able to re-load at higher yields soon. This week provides ample opportunity to buy paper with over $13 billion in supply slated for pricing. Ratios as a percentage of Treasuries remain on the rich side of the ledger, but this is our new normal. With the April 15th tax deadline in our rearview mirror, investors can refocus on the market and opportunities as we head toward the summer buying season. Quality 5% coupon bonds on the long end are available with a 4-handle yield. Notably, cheaper credit 4% coupons around the 20-year area are priced at a deep enough discount to par to place the market in no-man’s-land for retail buyers at the moment. Though not expected, should the opportunity present to accumulate 5% coupons at or below par -- BUY with both hands!