Expectations were virtually sealed this past week for the Fed to cut its target rate by 25 basis points on Wednesday afternoon. Economic data supported this narrative but raised the specter of more pe...
Capital Markets
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4 min read
Interest rates chopped around last week but ended with a bear-flattering bias. Specifically, 2-year Treasuries rose nine basis points, whereas 10-year Treasuries rose 16 basis points, and 30-year rates increased 18 basis points. Most interesting (to me, at least) was the price action on a 2-year paper. Recall that the market was closed on the prior Friday during the release of PCE and Chair Powell’s press conference later in the day. On Monday, after markets re-opened, 2-year rates rose from the previous week’s close of 4.62% to 4.71%, then chopped around throughout the week to close at 4.75%. The most interest-rate-sensitive portion of the curve ended the week above the meaningful 4.73% support level that has been the recent high-water market since November. The longer part of the curve had already pushed above support, suggesting that there may be more room for rates to continue to drift higher. All this price action precedes the important CPI release scheduled for this Wednesday. The economy's strength continues to take center stage regarding the battle over the direction of rates.
Municipals continued the trend from the prior week as interest rates rose along the curve, but unlike Treasuries, bear steepened as the front-end outpaced the longer maturities. Specifically, 2-year rates rose 14 basis points, whereas 10-year notes rose by 12 basis points, and 30-year paper increased by 13 basis points (per the Bloomberg BVAL AAA curve). Furthermore, ratios continue to trend off the lows from mid-March, but only modestly. Despite the lack of compelling relative value, the fact that absolute yields are at the most attractive levels we have observed in over a decade invites some investors to continue buying bonds. The cyclical slowdown typically experienced as we move through the always-critical April 15th tax period provides a reason for the price action and an opportunity to buy.
As suggested above, many SWBC client PMs have been managing the need for clients to attend to pending tax payment obligations. Activity has been slightly muted, but the common theme of barbell purchases and duration extension remains the same. The shape of the municipal curve, along with the continued theme of “higher for longer” interest rates, offers enough incentives for investors to engage in these portfolio management strategies.
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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