Additional rate cuts by the Fed have been further called into question, following the much stronger than anticipated Nonfarm Payroll report released on Friday. Although employment data around the holi...
Additional rate cuts by the Fed have been further called into question, following the much stronger than anticipated Nonfarm Payroll report released on Friday. Although employment data around the holiday period can usually be taken with a grain of salt, the 256k increase in jobs created versus the 165k survey created a strong market reaction. Interest rates responded sharply as 30-Year Treasuries touched the 5% threshold and, more importantly, 10-Year Treasuries blew through resistance at 4.73%. Notably, equities gave back the entirety of gains achieved thus far in 2025. The threat of a 5% 10-Year Treasury yield is not supportive of the equity market, and the ensuing retracement bears witness to this fact.
We fully expect the 5% level for 10-Year paper to be tested and breached in the first quarter — likely sooner rather than later. As pointed out in previous commentaries, there is little technical resistance above the 4.73% level to slow the ascent of 10’s to reaching 5%. Coupled with the Trump administration’s pro-business and tariff agenda, such an outcome has become increasingly more probable. One must look all the way back to 2007 (see above chart), prior to the financial crisis to find yields in excess of 5%. As shown below, rates peaked at 5.32%, a level that is within chipping distance and warrants considerable attention. Arguably, the opportunity for investors to lock in multi-decade high yields in fixed-income securities will likely be met with strong demand and buying activity.
Even prior to the release of the Dot-Plot in December, we’ve been cautious about the increasing possibility that the Fed would have to dial back further rate cuts in 2025, calling for no cuts during the year. As other forecasters notably changed their expectations last week, it appears that there is growing sentiment that the Fed will be less accommodating going forward. Furthermore, it is appearing increasingly likely that the Fed’s rate-cutting efforts beginning in September may have been premature, given more recent economic data.
SWBC asset management clients remained focused on getting cash invested in fixed-income portfolios throughout the last week. New issue deals were well subscribed, with repricing on strong demand being a common theme for much of the supply. Municipal yields generally followed the rate volatility in the Treasury market; however, the strong demand was highlighted by ratios reclaiming the lower end of the threshold near 65% for 10-Year and 79% for 30-Year paper. The forward calendar has started to build, suggesting supply may put some pressure on municipals as a higher rate environment continues to attract more buyers. Along with the rest of the country, we are heartbroken over the terrible fires destroying the homes and livelihoods of people in Los Angeles. Unsurprisingly, there has been an increase in requests for liquidity for municipal credits in the area. With history as a guide, it will likely take some time before the true economic impacts are understood given the enormity of the destruction.
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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