Though not exactly a scary thing to report, Friday’s market activity could appropriately be called, “A Quiet Place: The Day After”. As expected, with market participants either hung over, working thro...
Though not exactly a scary thing to report, Friday’s market activity could appropriately be called, “A Quiet Place: The Day After”. As expected, with market participants either hung over, working through a turkey-induced coma, or out-of-office, activity was very limited and quiet. Hopefully everyone had a chance to enjoy some time with family and/or friends and be thankful in the spirit of the holiday.
Prior to this past week, price activity in the rates market appeared to break from the upward-sloping trend channel in a sideways move. Then last week, yields moved lower at a sharp pace, testing key technical support in 10-Yr UST. Notably, the 200-day moving average (yellow) was tested on Friday and the market closed very near support just below that average at 4.16% (green) along with a nearly matching 38.2% Fibonacci retracement level. I’m a little surprised that the market responded so sharply, resulting in a meaningful decline in rates with the larger narrative still suggesting that inflation is not yet contained. To be clear, I can rationalize a corrective move. However, this price action seems a little aggressive given what we know. The expectation for month-end rebalancing trades may help explain some of the aggressive pricing, especially on lighter volume with fewer trades exacerbating the move lower. I am still left scratching my head a bit but expect some retracement back higher this week. As previously discussed, I have been fully expecting a continuation of the move to reclaim the April yield high at 4.73%. The move towards lower yields does not match with the broader inflation narrative that persists in the discussion about the state of the economy.
The current week and next have the opportunity to shed some much-needed light on the expectations for Fed policy at the December meeting. Specifically, a combination of strong employment reports on Friday and upside data surprise with inflation data (CPI and PPI) the following week may provide enough impetus for the Fed to pause. This would add support to the notion that the market should expect higher yields in the immediate future. On the other hand, the Fed will most likely continue down their stated path with a final 25 basis point reduction on December 18.
SWBC client activity was noticeably lighter throughout last week, but buyers continued to put cash to work at higher prices (lower yields) as the week progressed. The new issue calendar this week is slated with greater than $13 billion in supply to be digested. Coming off the past few weeks with a lighter supply dynamic, however, the larger calendar can be explained as a simple rebalancing for normal seasonal expectations. I fully expect the strong demand we have observed of late to continue. Mutual fund flows have experienced yet another week of positive flows suggesting that investors are not yet tired of the market opportunity, continuing to be buyers. The first few weeks of December may be characterized by larger calendars until the eventual slowdown around the Christmas and New Year’s holiday period. On average, I would expect to see between $7-9 billion in supply weekly supply over the course of the month.
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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