Market Commentary: Week of April 29, 2024

Economic data provides sufficient justification for the “higher for longer” interest rate narrative from the Fed, but the market sentiment remains somewhat divided. The contrast between participants calling for sooner (i.e., June) and multiple rate cuts in 2024 compared to those expecting the Fed to stay on hold is skewed towards the “hold” camp. On Thursday, Treasuries briefly made new calendar year highs despite the lower-than-expected Q1 GDP result (+1.6% vs. +2.5%) and weaker Personal Consumption data (+2.5% vs +3.0%). Traders were more interested in Friday's Personal Consumption Expenditures (PCE) Core Deflator release, which showed a larger-than-expected increase in core PCE despite weaker data released the previous day. This latest release aligned with the consensus and helped offset the previous day's data. Additionally, market sentiment regarding the geopolitical turmoil overseas appeared to differ from last week when it was the main focus.

The upward rate trend remains intact across the curve, though pockets of resistance exist. Notably, as demonstrated below, 2-year US Treasuries have been bumping against the psychologically significant 5.00% threshold for the past several weeks as rates consolidate. The sideways chop (as demonstrated in the red box) is a typical consolidation pattern until the next move in rates – which, at this point, I would argue for at least a test of last year's highs. Furthermore, 10-year rates have approached 4.75% before heading lower, but well within the current price range. The nearly unthinkable prospect of a 5% 10-year yield in December is on the horizon, signifying a move of higher than 100 basis points. This week, a significant amount of data will be released, which the market will need to analyze. This includes several essential indicators such as–ADP Employment Change, JOLTS Job Openings, ISM Manufacturing, Durable Goods Orders, and Nonfarm Payrolls, among others. On Wednesday, the Federal Open Market Committee (FOMC) Rate Decision will be announced, but there is virtually no expectation of change. Powell will probably “attempt” to sound hawkish, but the fickleness of the market may interpret his responses during the Q&A session differently. I’m not expecting much of a change in rates this week unless something highly unexpected were to arise.

Municipals ended the week with about five basis points higher along the curve in concert with higher Treasuries. The market absorbed the sizeable new issue supply last week quite well. The $3.1 billion Brightline deal captured much of the market's attention, especially the $925 million Mandatory Tender series with a 12% coupon at a discount. Many municipal investors, particularly SWBC's SMA-focused client base, did not participate. Nevertheless, I made sure to mention the loan, as I didn't want to be the only commentator failing to do so. On that note, SWBC’s client base continued to take a cautious approach to putting cash to work despite the better absolute yields available in the market. Most of the liquidity was sought on the front end of the curve, as extension trades appear to remain in fashion, with long-end 5% coupons still garnering solid attention. Clients voiced expectations of looking for good entry points as we head into the summer months, given the consistency of the trend for higher rates remaining intact. As usual, I expect market participants to come to the same conclusion simultaneously, and a “grab-fest” for bonds may ensue.

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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