Market Commentary: Week of October 10, 2023

Last Week

Groundhog Week! Last week was another brutal beatdown in the rates markets as the 30-year Treasury bond broke through 5% since the first half of 2007 on Friday. As I said last week, the sell-off in the rates market has become quite disorderly. Certainly, monetary policy and economic conditions are still important, but I feel the main driver is the bottomless cup of sovereign bond supply. When rates were near zero, deficits mattered optically but the pain was not yet present. Now deficits are growing exponentially and borrowing rates are triple what they were in the first quarter of 2022. From the demand side, domestic bank buying has and will continue to slow sharply as borrowing rates increase and excess reserves at the Fed drain away. On the foreign buying side, currency hedging costs have risen substantially along with the value of the US Dollar. Couple that with China’s many domestic credit issues and you have what we are seeing now, real rates in the mid-2%s. Meanwhile, the employment situation continues to show strength as Friday’s release of the September payroll report came in much stronger than expected, sparking a huge, end of week selloff. 

• The S&P 500 rose 0.47% for the week. The average daily move was 0.70%.
• The NASDQ advanced 1.60% for the week. The average daily move for the week was 1.24%.
• The 2-year Treasury yield increased 4 basis points, closing at 5.08% on Friday. High year-over-year 5.18%, low yield 3.77%
• The 10-year Treasury yield soared 23 basis points for the week, closing at 4.80% on Friday, a new year-over-year high of 4.80%. Year-over-year high yield 4.80%, low yield 3.31%.
• The VIX Index was nearly unchanged for the week, closing at 17.45 on Friday. Year-over-year high 34.45 and low 12.82.
• The MOVE Index increased 11.53% for the week, closing at 126.64 on Friday. Year-over-year high 198.71 and low 96.61.
• 5-year Investment Grade Corporates (as measured by Markit CDX) spreads widened 1 basis point, closing at 75 basis points on Friday. High spread Year-over-year high 111 and low of 62.29.
• 5-year High Yield corporate debt (as measured by Markit CDX) spreads increased 11 basis points, closing at 492 basis points on Friday. Year-over-year high 627, and low 408.
• US Dollar Index was nearly unchanged for the week, closing at 106.04 on Friday. Year-over-year high 114.11 and low 99.77.
• WTI Crude plunged 8.8% for the week, using the November WTI Futures contract, closing at 82.79 on Friday. Year-over-year high 93.68, and low 66.74.  
• Gold, as measured by the December futures contract, 0.97% for the week, closing at 1,830 on Friday. High price for the front contract year-over-year 2,056 and low 1,624.
• Bitcoin rose 4.06% for the week closing at 27,995 on Friday. High price year-over-year 31,386 and low 15,632.

The Week Ahead  

We come into a holiday shortened week with Treasury yields significantly lower as a strong flight to quality trade began overnight in reaction to the war in Israel-Gaza. As events unfold in this conflict, I expect strong market reactions, however I think the flight to quality bid will be successively less and less. Over the weekend there was a good amount of “Fed speak” with the prevailing message being that perhaps the Fed can allow the latest spike in real yields to replace further tightening. Perhaps. The big economic data event this week will be September CPI on Thursday.

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