Expectations were virtually sealed this past week for the Fed to cut its target rate by 25 basis points on Wednesday afternoon. Economic data supported this narrative but raised the specter of more pe...
In the fantastical book written by Lewis Carroll, Alice’s Adventures in Wonderland, Alice exclaims, “Curiouser and curiouser!” in response to her sudden growth after eating a piece of mushroom. Just as Alice is astonished by this strange occurrence, market participants could aptly be described as equally perplexed by recent market action. Interest rates have rocketed higher following September’s surprise 50 basis point rate cut by the Fed. To be fair, market volatility was expected to be extremely high leading up to Tuesday’s long-anticipated Presidential election. A nearly 80 basis point jump in the 10-Year US Treasury Note, however, would justifiably be considered an outsized move.
Another oddity worth noting is the fact that the always-important Fed rate decision is taking a back seat in the current news cycle. Such is the nature, however, of a Presidential election dominating all headlines. Given the very poor employment data on Friday, with a measly 12k jobs created per Nonfarm payrolls and a -112k Two-Month Payroll Net Revision, I would not expect the Fed to change course from their prescribed path suggesting a 25 basis point cut. The weaker data provides Chair Powell and Company sufficient cover to continue to cut rates in support of their mandate to encourage maximum employment. Furthermore, any deviation from their rate-cutting path, especially during election week would raise suggestions of political malfeasance by the Fed. The “need” for a stimulative policy by the Fed has more recently become a topic of debate, but we shall leave that discussion for another time.
Last week’s Treasury action reached new recent highs in rates across the curve as the Trump trade has been meaningfully priced into Treasury yields. Naturally, deficit spending would be expected in a Democratic administration should Vice President Harris prevail. A Trump victory notably brings an expectation of inflationary tariffs and increased deficits, as well. Some economists forecast an even more pronounced inflationary environment with a Republican victory versus a Harris win. I also remind readers that in 2016, following Trump’s initial victory at the polls, 10-Year Treasury yields rose by nearly 80 basis points (albeit from a much lower base) for the next 6 weeks following the election. Thus, higher rates already being priced into the market, and reasonably expected to be in our future on a going-forward basis, can be supported by previous historical events.
I continue to expect higher yields in the near future. As the attached chart indicates, 10-Yr rates have pushed through every meaningful technical resistance level since bottoming in mid-September. Furthermore, Friday’s price action with a sharp jump to close at 4.38%, blew right through the 61.8% Fibonacci Retracement level. As discussed previously, the potential to revisit (or exceed) April’s peak at 4.73% seemed a low probability only one month ago, but now appears to be a distinct possibility. The intensity with which rates shot higher on Friday adds some conviction to my expectation that a new 2024 high in rates may be in the cards. Make no mistake, at present, the Fed’s longer-term path towards lower rates remains intact. Thus, on a longer-term basis, such increases in yield should be seriously considered as buying opportunities to lock in generationally attractive yields.
SWBC municipal clients, along with the broader market, were notably quiet last week, though completely anticipated. On Tuesday, the market experienced one of the largest bid-wanted volume days in over a year. The SWBC trading desk noted that, despite the potential for the market to weaken on the potential supply, prices remained in line with recent prints, and trade activity was reasonably well received. Looking ahead, as I have suggested, new issue volume will be nearly nonexistent this week as issuers shy away from the uncertain market conditions surrounding the Presidential election. Some strategists have suggested that they expect supply to remain lower for the balance of the year and not resume the heady pace we experienced through 2024. I, on the other hand, expect a reasonable resumption of the previous supply pattern, as the need for infrastructure spending and development continues to remain a strong need for municipalities of all sizes.
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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