The trade war and tariff drama took center stage last week as the July 9th deadline for the 90-day pause from President Trump’s Liberation Day imposition ended. At the start of the week, rates continu...
Capital Markets
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5 min read
The trade war and tariff drama took center stage last week as the July 9th deadline for the 90-day pause from President Trump’s Liberation Day imposition ended. At the start of the week, rates continued with the cheapening move from the prior week as equities retraced the recent high, but in a relatively tame fashion. Perhaps as a conciliatory move and a can-kicking exercise, Trump delayed new tariff implementation, including 25% on both Japan and South Korea, to August 1. This likely provides an opportunity to get trade counterparts to the negotiating table. Additionally, the June 18th FOMC minutes were released, indicating a wide range of opinions on tariff impacts and rate cuts. The most commonly held opinion amongst officials regarding tariff impacts centered around the expectation for persistent, but uncertain, as to the timing and the degree of the effect upon prices. Some officials, however, indicated a willingness to consider a reduction in rates if the data indicated such a course of action was warranted. The stronger-than-expected July 3rd payrolls report likely threw cold water on this narrative. Then on Thursday evening, Trump hit Canada with 35% tariffs (effective August 1) and threatened higher levies on other nations. Tariff escalation must be closely monitored for ongoing market impacts.
Treasury supply and rising federal deficits maintained upward pressure on the longer end of the curve as market participants expect a greater term premium. All things being equal, the 10-Year and 30-Year auctions were well received as concerns about Bessent terming out debt seem highly unlikely, and the safe-haven nature of US debt remains intact.
This week, a slew of data will be released, including CPI, PPI, the Beige Book, Retail Sales, Housing Starts, and U of Michigan Sentiment. Absent truly unexpected data, rates are likely to remain contained based on the data alone. The ongoing tariff situation, however, can always provide impetus for a move to test extremes. If recent history is any guide, the market will likely react more intensely with a push to lower rates on positive developments than it would to a sell-off on increased tariff angst. Thus, given my longer-term perspective that rates will ultimately test higher levels, lower yields may be a good spot to fade should the market provide the opportunity.
Rate action continues to gravitate around the longer-term moving averages, with both 100-day and 200-day nearly identical around 4.34%. Last week, 10’s tested resistance around 4.42% before backing off, but ultimately closed very near this level. A break above brings 4.51% into play with not much to stop it from reaching 4.61% on a move above there. Should rates decline, the 4.33% level provides some support, yet a break brings 4.22% into play. Much like the recently deceased Michael Madsen dancing around as Mr. Blonde in “Reservoir Dogs”, rates are “Stuck in the Middle with You.” Despite pressure from President Trump, the Fed’s patient approach appears to be the most prudent course of action as inflationary pressures remain on the horizon, the labor market data failed to show further weakness, and the economy shows little sign of weakening.
From the Municipal Desk (with contributions from Ryan Riffe):
It was another quiet yet positive week in the municipal market. Once again, the bulk of this week’s activity focused on the front end of the curve. Despite a heavy calendar of new issuance, strong demand allows the market to continue absorbing supply. July’s steady stream of reinvestment capital, along with sustained positive fund flows for ETFs, municipal bond funds, and Separately Managed Accounts (SMA), is clearly constructive. Demand continues to be focused on maturities 10 years and in, contributing to richening ratios on the short end of the curve. Intra-week 3-Year and 5-Year ratios touched as low as 63%, a level not seen since February. In states with high deficits and tax burdens, such as New York and New Jersey, the competitive market has proved to be one of the main channels for meeting demand needs. This was evident with deals such as Bedford, NY GOs (Aa2) with the front-end pricing nearly 30 basis points through the AAA scale. Looking ahead, the new issue calendar is expected to ease slightly, with volume projected just under $8 billion (excluding notes). If fund inflows remain positive and interest rates stay range-bound, we anticipate the municipal market will maintain its current momentum for the near term.
Treasury Ratios
3-Year Ratio 64%
5-Year Ratio 64%
10-Year Ratio 73%
30-Year Ratio 92%
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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