As data was released last week, interest rates undertook a round-trip move on concerns that inflation had been reignited. Specifically, 10-Year rates covered nearly 20 basis points of movement in both...
As data was released last week, interest rates undertook a round-trip move on concerns that inflation had been reignited. Specifically, 10-Year rates covered nearly 20 basis points of movement in both directions before ending the week slightly below the prior week’s close. Hotter than expected CPI data along with mid-week supply in 10’s and 30’s contributed to the sell-off only to be countered by lower core-PPI data and weak Retail Sales later in the week. The unusual nature of the turnaround is owed to the fact that PPI typically has less significance to inflationary concerns than CPI. This time, however, some core components of PPI that are accounted for in PCE came in softer, suggesting that core-PCE may follow in kind. Tough talk from Trump on tariffs continues to cast uncertainty over the markets which leads to exaggerated moves and increased volatility.
The debate regarding the path of rates for the remainder of the year has the market quite divided. Has the 10-Year rate peaked for the year around the 4.80% level reached in mid-January, or can we expect to test higher rates at some point this year? The conflicting nature of data released this past week highlights the challenge in determining the future path forward. Furthermore, concerns about tariffs and their impact on the economy add another layer of uncertainty to the equation. The technical picture remains similarly murky, as the chart demonstrates a potential breakout of the upward-sloping trend channel (pink). The 4.50% support level (red) was broken but retraced higher before breaking down again on Friday. The question remains — was the move towards lower yields a true breakout? Given the significance of rates breaking below support, I expect lower rates to be visited. Once the intermediate support around 4.38% is broken, there is little from a technical perspective to stop a test of the 4.15%-4.20% area. I continue to have fundamental concerns that the inflation picture will remain sticky and higher rates will occur. We could, however, experience lower yields before retesting higher yields later this year. I also note that the uncertainty of the tariff picture may create added volatility and more extreme yield changes can be expected.
From the Trading Desk - Ryan Riffe
Another volatile week for municipals as the roller coaster of rates continued. The week began with a quiet tone and steady reads for the MMD curve. Secondary trading remained strong with good two-way flow. Competitive deals were aggressively priced, and many negotiated deals had to be repriced to lower yield targets. The strongest demand continues in the high deficit states (NY, NJ, MA, CT, CA) within the 2-12 yr part of the curve where we are seeing forced SMA buyers. The weaker parts of the curve, where we have seen the spread widening, have been for 4% coupons maturing in 20 yrs. Municipals followed the big Treasury sell-off on Wednesday, resulting in a 10-12 bp cut across the MMD curve. Although there was certainly a pause in trading, we did see buyers step in at new levels. We continue to believe money is sitting on the sidelines, waiting for more opportune entry points. Thursday and Friday, we saw a tentative rebound in munis as we approached a well-deserved long weekend. This week’s supply dips to only $5.65 billion, as expected during a holiday-shortened week.
Key Data Points:
- Sifma Index Yld: Reset this week from 2.07% to 3.36%
- 30-day Visible Supply: Decreases to 11.4B from 13.9B.
- 10-yr Ratio has moved higher from 66% to 68%
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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