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 bee...
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.
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