Last week interest rates largely followed the expected path from a technical perspective. Recall the week prior, 10-Yr UST pushed above a relevant resistance level just below 4%. Along with a handful of other meaningful technical and fundamental reasons, the expectation was (and remains) for 10s to test higher yields before heading lower again. A key near-term target remains the 4.16-4.20% area, which is expected to be touched in the near future.
Inflation data hit a small speed bump, with core-CPI coming in slightly higher at 0.3% MoM, and the YoY pace increased by 0.1% to 3.3%. As expected, PPI data was slightly more mixed with MoM core-PPI at 0.2%, but YoY data increased from 0.2% to 2.8%. This uptick arguably added a little fuel to the fire for rates to continue to ascend this past week. However, one month’s worth of data does not signify a trend. This sentiment was voiced by Fed Governor Williams’ statement, “Month to month, there’s wiggles and bumps in the data, but we’ve seen this pretty steady process of inflation moving <downward>… I expect that to continue.”
It’s been a few weeks since I referenced the upward slope of the Treasury curve. As the above chart indicates, following the longest inversion in history, the 2’s-10’s curve has maintained its upward slope despite revisiting the zero boundary (red line) briefly in the past two weeks. This ebb and flow is expected, but with the Fed telegraphing its long-term intentions, further steepening should be expected. Furthermore, I expect the front end of the curve to continue to move lower and extend the gap between 2’s and 10s as the Fed’s rate-cutting cycle persists. I reiterate my support for locking in attractive yields in the intermediate portion of the curve, especially with 10-year Treasuries above 4%.
Expectations for November’s Federal Reserve meeting continue to support a 25-basis-point cut, with an additional 25-basis-point cut at the December meeting. The most recent inflation and employment data have reduced the likelihood of a 50-basis-point cut in November and can arguably bring a pause into play. With more data pending prior to the meeting (especially PCE and employment data), the narrative can shift should the data suggest a change to the current sentiment.
With rates continuing to migrate upwards, SWBC clients were more selective in adding paper to portfolios over the past week. Flows were arguably lighter than average, but the right structure remained well-bid and showed signs of activity. Taxable municipal activity was notably weaker, which was unexpected as the value proposition with cheaper Treasury prices typically suggests better opportunities for buyers. Perhaps Hurricane Milton’s impending landfall was a distraction for enough participants as our colleagues in Florida had more important immediate concerns. Despite the holiday-shortened trading week, the new issue of municipal supply is expected to exceed $11 billion following last week’s light $7.8 billion of issuance. Fund flows remain positive, so demand continues to be solid, but activity is expected to slow down around the week of the election. I’m wondering out loud if last week’s slowdown was an early precursor for buyers taking a “wait and see” approach to the election results a little earlier than anticipated. Time will certainly tell.
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.
Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses, and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees, and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
© 2021 SWBC. All rights reserved. Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.