Continued Uncertainty Remains the Only Certainty Key Highlights Exceptional volatility in equities, rates, and the dollar continued through the second quarter of the year. Unusual events, including ge...
Capital Markets
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5 min read
We received an abundance of market-impacting news and events last week, and much of it was both bond and equity-bullish. To begin the week, Iran’s response to the US bombing of nuclear facilities was minimal. Additionally, progress on a cease-fire between Iran and Israel lent a positive tone to the markets. The revenge tax (Section 899 of the tax code) was removed from the One Big Beautiful Bill. This eliminated the threat of a tax on foreign investors, which could have diminished demand for US Treasuries. Progress on talks with China on a trade deal was well received by the markets as both Chinese officials and Commerce Secretary Lutnick echoed each other’s positive tone. Additionally, as the deadline for the 90-day pause approaches, Lutnick suggested that bilateral agreements with the other primary trade partners are progressing. Suggestions that President Trump could announce a Fed Chair replacement for Powell as early as September added a dovish tilt to rate talk. Comments from several Fed officials (Waller and Bowman) were notably dovish, suggesting that rate cuts could occur as early as July.
In response to all the positive news, the S&P 500 reached a new all-time high of 6187, and Treasury rates pushed lower and broke below a meaningful support level around 4.31%. Clearly, an improved geopolitical environment, Federal Reserve stability with a slight dovish tilt from some officials, positive investor sentiment, and a still resilient US economy with decent corporate earnings combined to provide a risk-on boost to equities. The initial scare involving a jump in the price of oil following the escalation of conflict between Israel and Iran was short-lived. Inflation concerns from fears that oil could sustain higher prices dissipated as quickly as lending near-term conviction to bond bulls as well.
The decisive drop in the 10-Year US Treasury note yield below the key support level of 4.31% opens the door for a test of the prior low from early May around the 4.11% area. Thus, for the near future, I expect rates to test this lower yield before resuming a move to revisit rates above the 4.50% area. My rationale is that I expect tariff-related impacts to begin to show in the data. Such was the case on Friday with core-PCE (the Fed’s preferred measure of inflation) unexpectedly ticking up 0.2%, pushing the YoY figure higher to 2.7%. Through much of 2025, the Fed has indicated that concerns about sticky inflation and failure to reach their stated 2% target have overshadowed concerns about a cooling jobs market. Both inflation and employment data have not provided a cause for concern, and the most recent unemployment data indicated that the unemployment rate remained at 4.2% - barely above the 4% threshold indicating “full employment”. That being said, market sentiment has shifted with participants positioning for earlier Fed rate-cutting action as a September cut is essentially priced into the market. With the July 4th holiday close on Friday, we will receive employment data for June on Thursday before an early 2:00 Eastern market close. With survey results indicating a tame Nonfarm Payroll figure at +113k jobs added and an increase in unemployment to 4.3%, perhaps we get a glimpse at some potentially weaker jobs data that could influence markets and rate projections before we watch some fireworks.
From the Municipal Desk (with contributions from Ryan Riffe):
The AAA MMD curve was little changed by the end of the week. Strongest demand continues to be in the 1-to-12-year part of the curve, which has been dominated by the SMA space. Competitive deals were well bid with tight covers, while negotiated deals continue to be oversubscribed across the curve. The municipal market has shown resilience in its ability to digest robust supply week after week. There have been several factors that have contributed to this momentum, such as positive fund flows, large reinvestment capital from summer redemptions, and a more stable rate environment. We look ahead to a shortened holiday week of just 3.5 trading days. The new issue calendar takes a breather as it looks to price in roughly $2.5 billion. We believe the drop in supply will be short-lived, though it may shift more attention to secondaries as July 1st inflows arrive.
Ratios as a percentage of Treasuries
3-Yr 70%
5-Yr 70%
10-Yr 76%
30-Yr 94%
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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