What a roller-coaster of a week last week. To be clear, I’m only speaking about my family trip to Universal Studios in Orlando, Florida, during the latter half of the week. I no longer have the stomach for the thrill rides (and market action has provided more than enough up and down price action to satisfy any thrill-seeking urges). Still, my kids thoroughly enjoyed the rollercoasters at the parks. Contrarily, as expected, interest rates chopped around in a consolidation pattern last week, ending very nearly where they started, around 4.24% on the 10-year US Treasury Note. Following the previous week’s volatility in the market, with the Juneteenth holiday on Wednesday bifurcating the available trading days, the market had every reason to hit the pause button on price volatility.
The strong participation during the most recent Treasury auctions continues to suggest that the market is leaning heavily towards expectations of easier Fed policy in our near future. Presently, the market is pricing slightly better than even odds for a September cut by the Fed. With continued chatter about the September meeting, we must not forget that the Fed has meetings scheduled for July 30-31 to provide some insight into their policy initiatives prior to the much-lauded September meetings. Furthermore, there will be plenty of data to digest as we move into Autumn, including core-PCE (the Fed’s preferred metric for gauging inflation) to be released on Friday, June 28.
The municipal market followed the lead of Treasuries last week with relatively muted activity. The below-average new issue calendar offered little inspiration for investors to aggressively attempt to put cash to work. At SWBC, we are focusing on the supply/demand dynamics of the market and listening to the tone of the discussion from clients regarding their limited urgency regarding purchasing paper. One common theme has persisted over the past several months, regardless of the expectations for changes in interest rates. Specifically, investors remain uninspired by the belly of the curve. As indicated in the above chart, the 4-year to 12-year portion of the municipal curve has remained relatively flat (even rising modestly in some spots) despite declining interest rates along the shorter and longer-dated parts of the curve. Investors that have pursued a barbell strategy, focusing upon the sub-2-year area and the 15 to 25-year areas, have benefitted in terms of recent performance.
With an above-average of $11 billion in supply coming to market this week, we expect investors to refocus attention on investment opportunities. Supply should be well received and digested by the market. We again highlight that any meaningful back-up in rates towards the April highs should be viewed as a buying opportunity by investors, especially given longer-term expectations for lower interest rates as Fed policy starts to suggest lowering the Fed Funds Target from the restrictive stance that began in March 2022 with the initial rate hike.
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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