Last week interest rates largely followed the expected path from a technical perspective.
Capital Markets
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4 min read
Rates covered a lot of territories last week for a “quiet” holiday-shortened trading period. We can take away a few things from price action throughout the week. Most notably, yields on 10-year Treasuries continue to hover around 4.50% of the area yet remain within the upward-sloping channel from January. Thus, a big move with lower yields does not yet appear in the cards. Rates failed to make new year-to-date highs; however, they came within a few basis points on 2-year paper and around 10 basis points on 10-year and 30-year paper. Economic data was generally neutral, though one could argue some of the figures had a slightly disinflationary bias. Fed officials and economists, on the other hand, continue to pound the “higher for longer” drum on interest rates, citing continued concerns about inflation.
Even though new issue municipal supply was extremely light last week, ratios as a percentage of Treasuries remained at the more attractive elevated levels achieved during the prior week. One week of light supply was insufficient to overcome the previously established weaker mood. Supply and demand are two of the primary forces impacting the underlying tone and direction of the municipal market. The elevated new issue supply was the driving force behind the aforementioned underperformance through much of April and May. Last week, liquidity was not as readily available. Both accounts and SWBC traders indicated that algorithmic trading shops slowed down their activity, negatively impacting the equation's demand side.
As the above chart highlights, absolute yields on municipal bonds (as represented by the Bloomberg BVAL AAA curve) are at the highest levels on a year-to-date basis. Furthermore, they are trending towards the recent highs established in October 2023. Looking ahead, I still expect future opportunities for investors to lock in higher absolute yields and better relative value (in terms of ratios as a percentage of Treasuries). This week, with close to $14 billion in supply for the start of the always anticipated June investment period, I don’t expect a sudden buying frenzy to begin to push yields lower. Some portfolio managers have indicated a more active pace of buying to lock in the currently more attractive yields. Municipal buyers are usually very cautious about jumping into the market and arguably err on the side of waiting too long. As a preemptive measure, I suggest that participants who are slower to act begin to prepare themselves for the opportunity to get more involved.
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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