Rates markets weakened last week as 10-Year Treasuries tested nearby resistance at 4.62% and 30-Year rates approached the 5.17% peak that was reached in October of 2023. Notably, rates are near the hi...
Capital Markets
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4 min read
Rates markets weakened last week as 10-Year Treasuries tested nearby resistance at 4.62% and 30-Year rates approached the 5.17% peak that was reached in October of 2023. Notably, rates are near the highest levels we have seen since prior to the Global Financial Crisis, which began in 2007. Aggressive Fed stimulus policies with a zero-interest-rate-policy (ZIRP) following the severe global recession, then later government stimulus in response to the COVID-19 crisis suppressed rates for an unprecedentedly long period of time.
Last week, headlines highlighted concerns involving an increase in deficit spending and a relatively weak showing for the 20-Year auction (which typically receives very little attention). Equities spent much of the week retracing their recent climb, with the S&P 500 slightly exceeding 5900 before closing around 5815 in a risk-off mode. Finally, on Friday, the ongoing tariff saga via social media as President Trump threatened 50% tariffs on the European Union and a questionable 25% levy directed specifically at Apple, targeting iPhone manufacturing overseas.
As JPMorgan Chase CEO Jamie Dimon suggested last week, healthy growth of the US economy continues to be a concern when he stated, “There’s a chance that (we will) have stagflation.” Though the likelihood of this outcome is arguably quite low, the fact that it has remained part of the discussion indicates that low growth and higher inflation threats must be considered by corporations and investors alike. Chicago Fed President Austan Goolsbee provided his context regarding continued patience before the Fed reacts with fiscal policy initiatives. He suggested that more clarity is needed and that stagflationary impacts from tariffs are “the central bank’s worst situation.” With this backdrop, I remain cautious about expecting any relief from the challenging economic scenario we have been experiencing of late. Supply chain issues have not yet been meaningfully observed as purchasers stocked inventory when the tariff threats were initially announced. However, as we move further along, the tariff-related impacts will likely begin to arise, as recent data suggests cargo from China at California ports has most recently been lower by upwards of 50%.
From the Municipal Desk (with contributions from Ryan Riffe):
Municipals continued to mirror the price action in the Treasury market. This is a very constructive development as the prior dislocation through March and April created a challenging environment for investors and market makers. In short, a return to a more stable market is a very welcome development. The larger new issue calendar was well absorbed by the market, as reinvestment funds, along with the relatively attractive absolute yields, offer a compelling entry point for buyers. Municipal funds have enjoyed four consecutive weeks of fund inflows, adding further strength to the buy-side of the equation. Ratios have pushed lower than the very attractive levels observed when the market destabilized, but remain in reasonably compelling territory. Looking ahead, we anticipate a solid summer buying period as we move past the holiday weekend and focus on opportunities for investors to lock in rates at decade-long highs.
Municipal-Treasury Ratios
2-Yr 71%
5-Yr 72%
10-Yr 75%
30-Yr 90%
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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