As expected, the rates market settled back into a consolidated range this past week following the prior week’s volatility. A lighter economic calendar and “not as much” Fed-speak ahead of the holiday weekend contributed towards the quieter market environment. Though the limited data was hawkish with May’s PMI reading coming in above the critical 50 level; rates in 10-Yr Treasuries maintained below 4.50%. The Fed minutes from the May 1st Federal Open Market Committee meeting were also relatively hawkish, though this meeting took place before the release of the dovish April CPI data. In short, following the aggressive move lower in rates and an overbought technical environment, the market was poised to consolidate.
Municipals finally displayed some noteworthy activity and provided a reason to pay attention this past week. Following nearly two months of strong new issue supply, municipals acquiesced to the pressure to fade regardless of the direction of Treasuries. Last week, I referenced a portfolio manager who hated the 3–12-year portion of the municipal curve. Almost on cue, this curve segment sold off significantly and introduced more attractive ratios as a percentage of Treasuries as a result. The below chart highlights the shift in the shape of the yield curve on a week-over-week basis. As a result, the belly of the curve is “less unattractive” than before. However, nobody seemed to be delusional and dive into this area based on the better relative value.
Customer activity was noticeably less active as the market cheapened up last week. As usual, many market participants wanted to wait until the dust settled to look for better opportunities to lock in higher absolute yields. I expect that we have moved into a newer range of ratios for municipals, especially the 10-year area of the curve. After spending much of the year in the 58-62% range, those ratios are finally becoming more interesting at a notable 67% ratio. However, unless at extremes, ratios are generally not a singular factor for investors to consider when making their investment decisions. To be fair, cheaper ratios provide some added incentive for portfolio managers or individuals to put cash to work. I don’t expect a sudden influx of buying activity because of the more attractive ratios. However, I expect a continuation of the relatively strong supply we have observed of late after we get through the holiday-shortened week with a modest $7 billion in issuance.
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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