With limited fanfare, interest rates continued to drift higher last week despite the quieter market environment during the Christmas holiday period. The ongoing concern that inflation has not been rel...
With limited fanfare, interest rates continued to drift higher last week despite the quieter market environment during the Christmas holiday period. The ongoing concern that inflation has not been relegated to the rear-view mirror remains an underlying theme for the market. The fact that the FOMC Dot Plot for Year-end 2025 was adjusted at the last meeting adds support to this narrative. In essence, the collective opinion of the Fed officials based upon their individual expectations of the Target Rate next year indicates similar concerns exist. Furthermore, an increasing number of Fed officials have recently stated that risks to inflation are “weighted to the upside.” Recent increases to CPI, PPI, and core-PCE are legitimately supportive data points suggesting that the disinflation battle has not yet been won.
The above chart highlights the sharp upward move in 10-year yields since the Fed announced its initial rate hike of 50 basis points on September 18th. The bond market has clearly had a different take on the inflation picture, and participants are voting with their portfolios. With only a few trading sessions left in 2024, it appears unlikely that the market will reclaim the April high at 4.73% by year-end. However, technical and fundamental factors suggest that not only will rates eventually test this support, but my expectation is that we will see a 5% yield handle sometime in the first quarter of 2025.
Looking at the tale of the tape, I observed some noteworthy technical factors worthy of mention:
- After the FOMC rate cut of 50 basis points in September (yellow circle), yields quickly retraced, blowing through minor support levels before testing the longer-term trend line (pink line) then decisively moving higher
- Over the past week, rates have tested the next area of support at 4.61% (yellow line), but we can expect only temporary respite from the upward move
- The April high at 4.73% (green line) is within easy reach of the market, which is testing higher levels as the aforementioned inflation narrative continues to unfold
- The price action (pink oval) following the October peak near 5% (light blue line) provided no resistance as yields fell sharply. Typically, if there are limited areas of resistance as yields come down, the market will not find much support as yields climb above a previously established support level.
SWBC client activity was light but within reason for the holiday week. Bid lists were more robust than the desk would have expected as clients attempted to shore up portfolios for year-end. Therefore, we observed decent two-way flow, and the market remained steady with no meaningful moves in either direction for benchmark municipal curves. Obviously, the new issue calendar was non-existent and will remain so around the New Year’s holiday. However, we expect a resumption of the strong pace of supply once we get into 2025. Municipal ratios as a percentage of Treasuries remain more expensive from a historical perspective, but absolute yields continue to entice investors with attractive levels.
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