After four days of strength in rates markets following the previous Friday’s mediocre employment report, Treasuries retraced about half of the move lower by the end of last week. The mid-week CPI and ...
Capital Markets
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5 min read
Even when economic data should dominate the market’s attention, new developments regarding the ongoing trade war still manage to steal headlines. The market shrugged off the prior week’s concern involving the House reconciliation bill and expectations for elevated federal deficit levels with lower yields by the end of the week. After emerging from the 3-day holiday weekend, news out of Japan regarding an expected decrease in longer-dated JGB issuance bled into the global sovereign bond market. Rates initially rallied through the meaningful 4.50% and 5.00% levels on 10-Year and 30-Year US Treasury debt, then retested those yields before ultimately closing lower on the week. The below chart of the 30-Yr US Treasury bond highlights the upward bias over the past several months, leading to rates nearly challenging the 5.18% high that was reached in October 2023. Skeptics have challenged that rates could remain elevated through much of this year, but the bond market is arguably factoring in the threat of stagflation with slower growth prospects for the economy and elevated inflation.
On Wednesday, as expected, FOMC minutes continued the narrative involving a patient and a wait-and-see approach from the Fed regarding rate cuts and stimulative policy. Notably, several participants highlighted concerns about supply chain disruptions resulting from tariffs could impact inflation. Additionally, the stagflation concerns mentioned above rippled through the market following the release of the minutes. Thursday, Q1 GDP’s first revision was bumped from -0/3% to -0.2%, a modestly better figure. Pending Home Sales dove to -6.3%, indicating the challenges for this important component of the economy with elevated prices and high interest rates. On Friday, core-PCE was released with little fanfare and an arguably less inflationary bias with +0.1% MoM and +2.5% YoY figures. Around the time of that release, President Trump posted on Truth Social that China “Totally Violated its agreement” with the US, effectively taking over the news cycle. We can undoubtedly expect the trade war to continue to create uncertainty and throw the market some curveballs, but the underlying difficulties for the economy must not be ignored.
I remain steadfast in my expectation that we will have fewer rate cuts this year than the two forecasted in the Fed Dot Plot, as was released at the March meeting. I have been suggesting at most only a single rate cut, with an outside chance that zero cuts could occur this year. I now view the odds of zero cuts to be about even, given the ongoing concerns about supply chain issues, the threat of an increase in inflation, a relatively stable labor market, and the outside threat of stagflation. Furthermore, the old adage, “Don’t Fight the Fed”, which has been resoundingly reinforced by their patient fiscal policy approach, continues to ring in the back of my head.
From the Municipal Trading Desk (with contributions from Ryan Riffe):
The municipal market finished last week stronger, with the AAA MMD scale lower across the curve. The strongest demand came for 2 to 12-year maturities as SMA reinvestment dollars continue to be actively deployed. The shortened holiday week experienced a below-average $6.5 billion calendar, which the market had no problem digesting. Competitive and negotiated deals were well received, and most deals had to be repriced to lower yield targets. On the competitive side, we saw deals such as Wilton, CT (AAA) pricing 1-8 YR maturities with spreads to MMD as tight as -24 basis points – highlighting the demand for retail-friendly structures for specialty state paper. A fifth consecutive week of meaningful fund inflows helped buoy the market. Looking ahead to next week, this sentiment is unlikely to change as the market looks to price over $15 billion. June's heavy reinvestment capital matched with strong fund inflows should continue to provide a positive undertone to the municipal market. The focus of next week will be on the primary market, giving potential opportunity for secondary buying.
Ratios
3-YR Ratio @ 71%
5-YR Ratio @ 71%
10-YR Ratio @ 75%
30-YR Ratio @ 92%
30-Day Visible Supply Increased to $27 Billion (Up from $15 Billion seen last week)
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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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