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...
Capital Markets
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5 min read
The tone of the market last week was one of consolidation. Rates generally traded within a narrow range, with 10-year UST bounded by 3.72% on the low side and 3.82% on the high side. Notably, the entire range was above the 3.68% level moments prior to the FOMC rate cut announcement from the prior week. Slightly better than expected economic data, notably 2Q GDP, Initial Jobless Claims, Durable Goods, and Capital Goods Orders, provided reason for investors to hit pause on further strength in bonds. On Friday, however, with another lower year-over-year reading, throwing core-PCE at 2.2% into the mix (the Fed’s preferred inflation gauge) keeps the trend intact for a continuation of lower monthly levels. Though the above data could be characterized as somewhat of a mixed bag, the Federal Open Market Committee's (FOMC) more aggressive 50 bps cut seems to continue to be justified, given the most recent economic data. The big question mark, however, will focus on employment data going forward – just in time for this week’s Nonfarm Payrolls report. The Fed has been very forthright in stating they are going to be more attentive to employment data now that inflation is in range of their target.
The range for 10’s appears to be well established between 3.60% and 4.00%, requiring a catalyst to move it meaningfully in either direction. Rates are near the middle of this range, as shown in the below chart. The 50-day Simple Moving Average in pink may offer an area to serve as a backstop for rates. This is not a hard line in the sand for resistance. However, it does serve as a good rough demarcation to keep in mind. The upper trend line in yellow, sitting at 4%, serves as a good level that could be tested without suggesting inflation is again moving higher. I continue to support buying on weakness and locking in attractive relative value.
Given the state of the economy, declining inflation environment, challenges to the jobs market, and a decisive Fed rate-cutting policy, expectations for lower yields should be the base-case in our future. However, one can expect that there will be opportunities to buy on weakness and extend duration before the front-end of the curve agrees with the Fed’s future path of rates. Oddly enough, investors continue to pile into money-market funds. At some point, the music of 1-year and shorter rates remaining meaningfully above most of the yield curve is going to come to an end. Cash is looking for a new home further out of the curve and will arguably be late to the game if timing is not properly managed.
The consumer continues to fight an uphill battle with purchasing power. Home sales and automobile purchases continue to struggle. Credit Card delinquencies continue to move higher. The strength of the economy on the backs of consumer purchases seems like it will run into some headwinds in the future. Any negative jobs data will not help reverse these trends, thus calling for the Fed to maintain its rate-cutting path and possibly accelerate future cuts.
SWBC clients were heavily focused on the new issue market in municipals this past week… and I can’t blame them. Issuers and underwriters are pricing negotiated loans at cheaper levels than the secondary market is providing. Deals remain well-subscribed and SMA money is heavily attentive in the 2-12 year portion of the curve. We note a particularly aggressive competitive environment for bonds inside of 3 years. Mutual funds continue to gather monies, keeping the demand side of the equation strong with the 13th consecutive week of inflows. With just under $10 billion in supply this week, we expect more of the same focus from accounts. Notably, we have been focusing our efforts on the taxable municipal space and have had good participation as a result. Keep SWBC in mind for your taxable municipal inquiries as we are dedicating efforts towards maintaining a presence in the space.
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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