Market Commentary: Week of February 5, 2024

I hope everyone was wearing their seatbelts this past week.

Early in the week, the market was relatively quiet ahead of the heavy data calendar, Treasury Auction announcement, and the ever-important FOMC meeting. Despite Chairman Powell’s attempt to provide a hawkish tone with his comments on Wednesday, the market caught a meaningful bid and rallied significantly below 4% on 10-Yr UST. The strong tone continued Thursday in the wake of the negative news regarding NY Community Bank, only to be thwarted on Friday with the surprisingly strong Nonfarm Payroll release. Regardless, the adjectives used on the desk to describe market activity over the past week were “colorful” to say the least.

Market sentiment suggesting a sense of confidence that inflation was well-managed and trending lower if not outright contained, provided much of the impetus for strength in the market earlier in the week. The strong payroll number coupled with the uptick in wage growth, however, threatened the containment of the inflation story and resulted in the sharp sell-off on Friday. This whipsaw market action covered a meaningful intra-week range in rates. The 2-Yr UST did a round-trip from 4.35% to 4.13%, only to close back up at 4.37%. Similarly, the 10-Yr UST traveled from 4.14% to 3.81%, closing at 4.02%.

Municipals experienced a similar ride throughout the week, with investors taking a wait-and-see approach until the Fed minutes were distributed; after which a minor buying frenzy ensued. The strong market reaction continued through Thursday with SWBC clients participating with aggressive buying activity. Notably, the demand picture was well illustrated with $1.5 billion cash inflow into funds last week. This equaled the best weekly fund flows over the past year, which had been decidedly negative over the prior two-year period (see below chart). I continue to believe that pull-backs in rates offer investors an attractive entry point to lock in yield. If the below data continues, expect to have some competition as cash continues to seek a new home.

Definitions:

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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