Rates markets weakened last week as 10-Year Treasuries tested nearby resistance at 4.62% and 30-Year rates approached the 5.17% peak that was reached in October of 2023. Notably, rates are near the hi...
Capital Markets
|
4 min read
The news cycle surrounding the ever-developing trade war continues to be the most important criteria influencing financial markets. Economic data seems to be an afterthought as escalation or de-escalation rhetoric drives price action. Additional headline concerns included the unexpected threats, followed by the eventual retracement of President Trump’s desire to relieve Chair Powell of his post at the FOMC. Regardless of the likelihood, legality, or reality of this coming to pass, such ominous statements undermine the markets and create a sense of unease and uncertainty that fails to instill confidence on the part of the investment community. Since there is little faith that disruptive statements will cease to emanate from Washington, it is more difficult to have conviction regarding the tone or direction of the markets on a day-to-day basis.
Both stocks and bonds began the week with a softer tone that turned decidedly positive as time progressed. President Trump retracting his comments about firing Powell added to the risk-on tone. Additionally, Secretary Bessent’s comments suggesting improvement on the trade war with China, as the current situation is unsustainable, added further fuel to the positive market developments. Though these near-term developments have been constructive to the markets, the bigger issue regarding the impact on the economy of any trade disruptions, let alone a protracted trade war, is a more important long-term concern. Furthermore, recent suggestions that the Fed will likely act with a rate cut at the June meeting make little sense in my opinion. The Fed has been adamant regarding their desire to observe more consistent and sustained evidence suggesting a cut is needed. Continued disruption and uncertainty regarding the path forward due to unsettling statements from President Trump are counterproductive to providing the stability required by the Fed to act to lower rates. Until we have more clarity, I continue to expect a higher for longer rate environment and fewer rate cuts by the Fed as they will be more likely to continue to wait for evidence that a rate cut is unequivocally needed, and inflation is not the primary concern.
The week ahead brings a number of important economic releases. The Fed’s preferred measure of inflation, Personal Consumption Expenditures (PCE), will be followed later in the week with Nonfarm Payrolls data. However, I will be most anxiously awaiting Wednesday’s preliminary estimate for Q1 GDP. In harmony with the broader geo-political narrative, expectations consist of a wide array of predictions, from -2.5% to around +1.5%. The lack of consensus is notably in line with the increased level of uncertainty defining our current economic environment. In the unlikely event that President Trump avoids making disruptive and inflammatory statements, we may be able to observe how the market will interpret the important data that will help drive future Fed decision-making going forward.
From the Municipal Desk (with contributions from Ryan Riffe):
The municipal bond market experienced another volatile week of price action. On Monday and Tuesday, the MMD AAA scale weakened between 10 to 16 basis points at various points along the curve. Later, with risk assets stabilizing and Treasury yields falling, the aforementioned trend in tax-exempts reversed mid-week, leading to 12 to 15 basis points of strength. Encouragingly, the latter half of the week witnessed a good two-way flow, indicating increased underlying demand. In addition, ratios remain at attractive levels for investors. Robust new issue supply, increased customer Bid-Wanteds, fund outflows, rate volatility, and clarity regarding future tariffs have all contributed to the pressure imparted upon the municipal market. As we look ahead, May will bring a meaningful increase in reinvestment capital, which should provide much-needed support. Furthermore, the new issue calendar should continue to normalize from the elevated levels we've experienced so far this year. This, in turn, should shift the imbalance of supply and demand that has cheapened the market for most of March and April.
5-YR Ratio @ 80%
10-YR Ratio @ 80%
30-YR Ratio @ 94%
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.
Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
© 2021 SWBC. All rights reserved. Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.
Let Us Know What You Thought about this Post.
Put your Comment Below.