Limited economic data allowed the markets to take a breather this past week. The blackout period ahead of next week’s FOMC rate decision further contributed to the consolidative tone in interest rates. Market reaction on Tuesday, following the MLK Day Inauguration of President Trump, provided a limited and brief rally as 10-Yr UST flirted with the 4.52% level, only to retrace to close nearly unchanged on the week near 4.62%. Initial fears were averted regarding increased tariffs on Chinese imports, as a more modest 10% figure was suggested but nothing instituted, yet.
As demonstrated in the chart, the yield curve has continued its steepening trend over the past month as normalization takes place, peaking in the last 2 weeks at 42 bps. For context, over the past 10-, 20-, and 30-year periods, the yield curve has averaged 61 bps, 103 bps, and 96 bps, respectively, with a high of 291 bps. This follows the longest period for an inverted yield curve in history. Therefore, as the healthy economy continues, regardless of the direction of rates, the yield curve has plenty of room to climb towards historical averages. The curve’s bear steepening bias continues to suggest that market participants remain concerned about the inflation outlook but retain a constructive bias regarding economic growth prospects.
Looking ahead, advance 4Q GDP data, Initial Jobless Claims, Pending Home Sales, and the always important PCE Index will be released following the FOMC rate decision on Wednesday. The market will continue to look for clues regarding the inflation picture, but the predisposition toward higher yields continues. The potential for a correction in equities and a shifting of the narrative was demonstrated with the AI release from the Chinese chipmaker, Deepseek. If this turns out to be truly disruptive, we could experience a bigger move in rates as the concerns about inflation take a backseat to concerns about economic growth and confidence from corporate chiefs takes a hit — eventually bleeding its way into the labor market.
From the trading desk of Ryan Riffe:
The shortened holiday week was volatile, as demonstrated with both upwards and downwards price movements to the AAA MMD curve. By the end of the week, the curve flattened, with 2-15 yr maturities lower by 8 basis points and the long-end only lower by 2. SMA, retail, and street accounts were all engaged as the positive tone continued for Tuesday and Wednesday's trading sessions. Competitive scales were aggressively priced and negotiated deals were well received. Early Thursday, the secondary bid-side was notably strong. Accounts likely received reduced allocations on new deals, causing demand to spill over to the secondary. In addition, with February only one week away as one of the heavier redemption months, dealers have been more willing to take on risk and increase inventory levels. However, Municipal strength declined throughout the day on Thursday as the US Treasury sell-off deepened.
Friday remained quiet, with light secondary trade volume. Specific California credits that have been affected from the ongoing fires, such as the Los Angeles Dept. Of Water & Power, continue to be trading in high volumes. We have seen spreads on Los Angeles DWAP tighten significantly since last week's flurry of bid-wanted activity. The new issue calendar drops next week to about 5.5 billion, which could help stabilize some of the volatility.
Ratios & Supply:
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