Market Commentary: Week of March 4, 2024

I had an insightful and productive trip last week attending the Municipal Bond Buyers Conference in Florida, but I’ll get to that shortly. Interest rates bounced within a relatively constrained range, with the 4.19% resistance level and 4.35% support level acting as bumpers. On Thursday, the Fed’s preferred inflation metric (Core PCE) came “in line with expectations,” providing a modest relief rally as upside risk was the market's primary concern before its release. Thus, the market breathed a sigh of relief that inflation did not appear to tick higher ending the week near the bottom of the range. Despite that, economists' calls for expected Fed policy action remain widely split. Though expectations have drifted toward fewer and less immediate calls for rate cuts, some market pundits still call for no cuts to the Fed funds target rate in 2024.

The municipal market was quieter than normal throughout much of the week. This was unsurprising given the relatively expensive ratios for municipals, especially out to 10-year maturities, which I highlighted in the prior week’s commentary. Despite the increased new issue supply, demand was still quite strong, providing an underlying bid to the market. Credit spreads in municipals continue to be driven lower (see chart below). As indicated, the spread over AAA-rated credits for single A-rated municipal securities are steadily trending lower in 2024. Additionally, spreads have generally tightened following the liquidity event in early 2023, leading to a spike higher to 76 basis points. Notably, however, the 2021 low of 24 basis points leaves plenty of room for compression should market sentiment remain strong, as the market is essentially in the middle of this recent range.

Back to the conference - it was a resounding success, providing the opportunity to connect with old friends and meet some new ones. Many of my buy-side colleagues expressed frustration with the relative lack of value in the municipal market and cited the below 60% ratios as a level below which they were reluctant to add to portfolios. Another common theme was the desire to add duration to portfolios by further extending the curve while limiting the callable structure to exclude calls within five years. There are plenty of short-duration buyers. However, this represented a shift for those with the opportunistic ability to engage in alpha-seeking trades with greater duration exposure.

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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