The Treasury market traded with a consolidative tone throughout the week. Ahead of Wednesday’s FOMC announcement, which, as expected, delivered no rate cut, interest rates moved lower and remained rel...
The Treasury market traded with a consolidative tone throughout the week. Ahead of Wednesday’s FOMC announcement, which, as expected, delivered no rate cut, interest rates moved lower and remained relatively contained thereafter. Between the official announcement and Chair Powell’s responses to questions, the tone was relatively neutral. The modest tweaks to the language used in the official statement regarding inflation were acknowledged by Powell, suggesting that the downward trajectory has stalled. Accordingly, the 10-Yr Treasury yield has similarly stalled as it finds key resistance around the 4.50% level.
On Friday, all eyes were on Core-PCE, the Fed’s preferred measure of inflation. Data was notably in line with expectations at +0.2% MoM and +2.8% YoY. As expected, the market showed little inclination to move in either direction following the release. Tariff news from the White House continues to garner attention, as market participants attempt to discern potential inflationary impacts from any such actions. Specifically, Trump announced tariffs of 25% on both Canada and Mexico, along with 10% on China, effective February 1. Statements included with the announcement regarding failures to stem the flow of illegal immigrants and drugs across the borders suggest the intention to use the imposition as leverage beyond trade negotiations. Additionally, Trump has focused his staff on investigating trade issues beyond these three counterparties, suggesting tariff considerations on other trade partners may be on the horizon.
We remain focused on the potential inflationary impacts Trump’s tariffs could have on the prices of domestic goods. We are thoughtful that the Fed may have similar concerns regarding the potential for reinflation, thereby influencing them to keep their Target Rate higher. Questions about the potential impacts of stricter immigration policies persist, however, they will probably take longer to present themselves. Furthermore, the assumption that fewer low-wage laborers would cause a decline in Nonfarm payrolls would likely be limited to specific sectors of the job market. Thus, expectations regarding the impact on the unemployment rate are not as clear-cut as suggesting native-born workers will universally benefit from less competition for available jobs.
Next week, we will look to Friday’s Nonfarm Payroll and Unemployment Rate releases for further clues about the direction of rates. The consensus is for +150k jobs and an unchanged unemployment rate at 4.1%. Prior to this, JOLTS for December and the Quits Rate may offer some clues for the tone of Friday’s data. The supply/demand dynamic for Treasuries remains a consideration as we move forward with the new administration. Normally, refunding announcements are overlooked. However, there is an outside chance we receive intel from Secretary Bessent about his intentions to increase auction sizes and thereby supply this Wednesday. Notably, he will only have been in office for around one week at the time of the announcement. If he decides to enact policy changes with the same urgency President Trump has demonstrated with executive orders, we may expect some market-moving news on supply this week. It is more likely, however, that we must wait until the May announcement.
From the Trading Desk of Ryan Riffe:
The Muni Market closed out January in a solid fashion with lower yields across the curve. The MMD scale finished lower by 5-10 basis points: the strongest performance in 10-12 yr maturities. Competitive deals were well bid, especially for off-the-run General Obligation names for the high deficit states (NY, NJ, CT, & MA). SMA demand has forced these deals to be priced at spreads below AAA MMD in the 2-12 Yr part of the curve. Negotiated deals were also well received, particularly those offering extra spread to the market, which were oversubscribed anywhere from 5 to 15 times. Inflows, although down from last week’s $2 billion figure, were still positive with investors adding over $700 million to municipal bond funds. Although ratios remain expensive to historical norms, we believe municipals should continue to perform well in the near term. From a demand perspective, there continues to be heavy inflows into municipal funds, ETFs, and SMAs. In addition to inflows, February is one of the heavier redemption months of the year. Simply put, more reinvestment dollars chasing after fewer bonds.
Ratios (As of Friday PM)
3-Yr 63% 5-Yr 64% 10-Yr 65% 30-Yr 83%
New Issue Supply
Expected volume: 5,236,004.87 (in 000's)
(Excluding daily issues, corporate issues, VR issues, and notes)
**Consistent with last week's 5.5b
30-Day Visible supply sits @ 7.39B
**Consistent with last week's 7.9B
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