In a surprise to virtually nobody, the Fed’s 25 basis point cut last Wednesday was met with an immediate rally in rates, testing the 4.00% threshold before retracing and closing higher on the day. As ...
In a surprise to virtually nobody, the Fed’s 25 basis point cut last Wednesday was met with an immediate rally in rates, testing the 4.00% threshold before retracing and closing higher on the day. As we predicted, the “hawkish cut” to rates materialized with Chair Powell’s comments during the press conference, characterizing the move as a “risk-management cut and the “meeting by meeting” nature of future cuts is expected for the remainder of 2025. Notably, the SEP (Dot-Plot) suggests otherwise, as the median forecast amongst the committee contains 2 more cuts throughout the remainder of the year. So perhaps he was attempting to posture that the FOMC remains data-dependent, though current expectations indicate a more accommodative stance going forward.
The equity market continues to make new highs (S&P 500 pushed above 6665 before Friday’s close) as we have entered a new phase with the Fed’s fresh rate-cutting policy stance. The rates market, on the other hand, clearly rejected lower yields as the 10-Yr Treasury Note reached 4.14% before Friday’s close after rejecting 3-handle yields. I would characterize this price action as a “buy the rumor, sell the fact” type of move, as lower yields were heavily priced into the market prior to Wednesday’s FOMC announcement, having declined nearly 25 basis points over the prior 30-day period. Market participants continue to be divided about the sustainability of sub-4.00% yields going forward. Yours truly, is in the camp that the newly announced rate-cutting cycle has yet to meaningfully steepen the very front-end of the curve, and a 3.625% median Fed Funds target for this year suggests that 10-Yr yields below 4.00% will be difficult to hold. That is not to suggest that the market will not visit lower levels, but perhaps such moves can be faded as a trade on over-zealous buying that is not supported by expectations of a steeper yield curve. The 3.86% yield level represents the April low following Liberation Day and could be the first lower level to eventually be tested. By no means is this a suggestion to fight the Fed, but rather a willingness to suggest that the market could become overbought, and a retracement of such a move may offer additional trading opportunities for astute traders.
From the Municipal Trading Desk (with contributions from Ryan Riffe):
Municipals were steady to slightly firmer over the course of the week. As seen throughout the month of September, the strongest demand was demonstrated in long-end maturities of 20-30 years. A light new issue calendar, robust municipal fund inflows, as well as limited secondary bid lists contributed to the positive momentum. However, Thursday’s price action introduced the first cuts in municipal pricing since early September, as the market followed weakness in Treasuries post-FOMC. Due to heavy over-subscription in the primary market and a more limited offering environment, investors have been forced to source bonds through the secondary market. We look ahead with caution, given how far we've come in such a short time. Since the start of the month, the long end of the curve has rallied by more than 30 basis points. The market will be tested as new issue supply jumps to $16 billion, which is the largest weekly supply in over a month. Seasonal headwinds may also be a challenge, as both September and October are historically among the lightest months for reinvestment capital and represent a challenging period in terms of performance of tax-exempt paper in general.
30-Day Visible Supply @ $20.1 Billion
Weekly Calendar expected @ $16 Billion
2-Yr 56%
3-Yr 57%
5-Yr 59%
10-Yr 70%
30-Yr 90%
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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