Last week’s data was relatively mixed, but the market’s interpretation leaned decidedly bullish. As a result, rates were pushed through support, and the next meaningful lower level was tested (4.70% in 2-year, 4.30% in 10-year, and 4.50% in 30-year). Fed policymakers have continued their “higher for longer” proclamations but are undoubtedly relieved by the market's expectation that inflation will move closer to their 2% target. The bounce on Thursday and Friday puts rates back into a range supported by the 200-day moving average. So, some consolidation may be expected this week, with less new information scheduled to be disseminated.
Ratios in the municipal market ticked higher following multiple weeks of above-average supply. Though not earth-shatteringly attractive, further out the curve, ratios touched levels not seen since late January -- 10 years at 61%. We’ve experienced some strange dynamics recently in municipalities. Specifically, 4% coupons enjoyed an outsized rally, with spreads tightening as compared to bonds with a 5% coupon. As a result, clients have backed off purchases of longer-dated 4’s at a discount. Though the market has cooled in this regard, some thoughtful accounts have begun to entertain selling into the strength given the limited upside potential and arguably greater risk of credit widening down the road.
Aside from a reluctance to pursue 4% coupons, clients have continued to focus on optimizing purchases with a barbell structure. The front end of the curve and cash positions continue to offer attractive rates. The shape of the yield curve provides little incentive for engaging buyers in the 4 to 12-year range. One Portfolio Manager, who shall remain nameless, rather succinctly summarized his stance, “I hate the belly with rates lower than the front-end so that I won’t buy there.” With a decade-long relative value opportunity to lock in higher yields further out the curve, any backup in rates coupled with the Fed’s stated position should be viewed as a buying opportunity.
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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