Price action from the prior week put us on high alert for lower yields given the weekly closing level on February 14th below support at 4.48% on 10-year UST. As a follow-up last week, rates effectively consolidated around the 4.50% yield level to finally close even lower at 4.43%. As previously discussed, the technical picture for the rate market has shifted with meaningful support levels giving way and the recently established 4.40% level now on the clock. A break lower provides ample justification for a test of the next major level of support near 4.15% after seeking out the 200-day moving Average at 4.25%. An apparent distraction from the Trump White House regarding federal employees and fewer headlines about tariffs and a trade war likely provided the market with another reason to find a bid side. Additionally, my justification for the shift in sentiment includes back-tracking on my expectation that Treasury Secretary Bessent would be more aggressive regarding an increase to longer-dated Treasury issuance. He effectively put such expectations to rest this past week in responding to reporters’ questions about the supply picture.
This week, all attention will be focused on the Fed’s preferred measure of inflation – core-PCE, to be released on Friday to close out the month. Survey results include a 0.3% MoM figure and 2.6% YoY, continuing to make progress toward the Fed’s stated goal of revisiting the 2% target. In the bigger picture, another item to keep on one’s radar screen is the expectation that the Fed suggested in the latest release of FOMC Minutes regarding the end of QT. Recent chatter has raised the possibility that future purchases could be focused on shorter maturities to more closely mirror the outstanding Treasury debt. Though this alone would likely have little influence on longer maturities, the steepening of the yield curve with lower front-end rates would be a logical conclusion.
The current Effective Fed Funds Target Rate of 4.33% remains a concern as it presents a challenge for the Treasury Market to push appreciably lower until the Fed provides direction that easier monetary policy is on the horizon. For this reason, among others, despite the technical factors suggesting lower rates in the immediate future, I continue to believe that the 10-year UST may threaten a resumption of its upward trend, albeit at a further point in our future. I reiterate that the inflation picture remains a concern even if the recent trend has been favorable. Trump's policies as a reinflation catalyst must be carefully analyzed to determine how much follow-through and realistic impact may be expected as opposed to the use of tariff threats as a tool to receive concessions from US trading partners.
After consecutive weeks of volatility, the municipal market finally took a reprieve. Following the strength in the US Treasury market the MMD scale tightened as much as 6 basis points in parts of the curve (with the belly receiving the strongest bids). While SMA money continues to be deployed for 2 to 10-year maturities, accounts have actively taken on more duration risk in 15- and 20-year maturities. Notably, 2039-2045 has become the steepest part of the MMD curve, and accounts are certainly taking advantage of this recent steepening. Although down from previous weeks municipal bond funds saw more than $500 Million of inflows. Secondary trading seemed to take a back seat to the primary market as most negotiated deals were well oversubscribed across the curve and had to be repriced to the downside. 30-day visible supply remains manageable at $11.6 billion as we head into the last week of trading in February.