Volatility was on full display this week as rates tested new cycle highs after the Trump election victory. On Thursday, the FOMC rate decision was announced calling for a 25-basis point cut followed b...
Rates remained in a consolidation pattern for most of last week after having sold off sharply the week prior. Unsurprisingly, the market entered oversold territory after rising around 30 basis points over a 6-day period, peaking at around 4.11%. Notably 10-Yr UST maintained levels above the 4% threshold after testing it on Wednesday with short-covering buyers largely providing impetus for the bounce lower from 4.11%. This price action reinforces the narrative that there is room for higher yields to be reached above the current market, but I believe we are close to a peak during the current cycle. A confluence of factors detailed below aligns to support this thesis.
As the chart indicates, rates pushed above the downward trend line (light blue) but, given the broader interest rate picture and Fed rate-cutting policy, a push back to 4.50% (or higher) seems like a stretch. Some notable technical factors to consider include, first the 200-day simple moving average at 4.17% (yellow). Second, 4.165% represents a 50% retracement (green) between the April peak and Fed rate cut September low of 3.60%. For what it’s worth, 4.30% represents a 61.8% Fibonacci retracement that is worth noting, but I’m not convinced it gets tested, yet. Third, major resistance to higher yields from July’s price action around 4.16 - 4.20% is slightly above where we are now and bounded by the top of the white rectangle in between prior resistance (now support) at 3.98%. At some point in the not-too-distant future, the opportunity to lock in yields meaningfully above 4% will no longer be available.
SWBC municipal client activity continued to focus upon the new issue market but demonstrated lighter action in secondary paper. Many deals were oversubscribed, particularly at the long end of the curve (up to 20X in some instances). Given the larger interest rate narrative, 4% coupons at a discount garnered a lot of attention. Such structures offer a solid “bang-for-your-buck” performance trade for investors to lock-in attractive yields with the upside to capture alpha in portfolios on a rally in rates.
This week’s calendar is showing the first sign of slowing ahead of the election with around $8.2 billion scheduled for pricing. Demand has thus far remained robust with continued strong positive fund flows for the 11th straight week with $1.7 billion last week. Buyers continue to seek opportunities to put cash to work. Once the dust settles with the election, I expect investors who have not had the chance to engage already, will more aggressively pursue getting invested.
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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