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...
If I were allowed the liberty of assuming that a single avid reader of my weekly missive actually exists, such an individual would notice that rates pushed through the key resistance levels I have been discussing for several weeks. After 10-Yr Treasuries established a base and pushed above the 4% threshold, I anticipated a test above 4.20% which was achieved last week with a close around 4.25%. But what’s next?
This week, fundamental factors will come more into play as employment data (JOLTs and Quits Rate) will be closely watched for indications of resilience or cooling. Additionally, 3Q GDP will be released on Wednesday with a solid 3.0% forecast as the anticipated result. The Fed’s preferred inflation index, PCE, will be released on Thursday with survey results suggesting a small downtick is expected.
Shortly before and following the Fed’s September interest rate cut, when 10-Yr Rates were below 4%, the likelihood of the market revisiting 4.50% was a bit of a reach. But the narrative has shifted; I can now see this as a realistic, but not strong possibility. The 4.30% level represents a nearby resistance price and further ties into the 61.8% Fibonacci retracement percentage of the rally from April’s 4.74% peak. Though the 4.30% level could be an area that provides resistance, should the market get above it, a test of 4.50% could easily come into play. Volatility resulting from shifting polling data and ultimately the Presidential election is expected to have a market-influencing impact. Furthermore, the market has positioned for the Trump trade which has arguably been a factor for rates reaching their current levels. At this point, however, I am reluctant to suggest that the current rate cycle peak has been reached and a Trump victory with the potential for a GOP sweep in Congress could provide the stimulus to goose rates higher. Though reinflation concerns have reared their head, the continued Fed path for lower rates remains the longer-term narrative. Consistent data would be required to steer the Fed off this path — let alone influence the pace of their efforts. Given the size of the recent pull-back in rates, I would caution against waiting to be a buyer and encourage putting cash to work at these revisited attractive yields.
In speaking with a number of asset manager clients this past week, I am reminded of the powerful words from Clark Griswold in the film, Christmas Vacation: “If I woke up tomorrow with my head sewn to the carpet, I wouldn’t be more surprised than I am right now.” The municipal market unexpectedly threw everyone a curveball with the most volatile week of the year. Intel from the SWBC trading desk following sizeable cuts to MMD early in the week suggested that accounts were anticipating stability on Wednesday, only to have a surprise early day read for meaningful cuts. As usual, at some point such market action creates opportunity. To paraphrase one of our traders, this market action may have been the reset we needed. Accordingly, buyers were active on Thursday and Friday, taking advantage of the newly attractive levels. With quality 5% coupon paper available with a 4% handle, an opportunity to lock in purchases at such attractive levels on the back-up in rates should not be passed up.
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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