Expectations for the FOMC to cut the Fed Funds Target Rate by 25 basis points at the next meeting on September 17 have now become a foregone conclusion. Friday’s much weaker-than-expected Nonfarm Payrolls Report, with only +22k jobs created and the 3-month average dropping to only +29k, suggests a meaningful cooling of the jobs market. In recent weeks, my rather staunch opinion that the Fed would maintain a steady policy stance this year has shifted. Chair Powell’s dovish message at Jackson Hole and a more unified voice from Fed officials that the employment situation is cooling faster and eclipsing concerns about stickier or rising inflation indicate the imminent rate cut on our horizon.
Equities initially reacted with strength to the NFP data on the perception that rate cuts would boost the economy. As the morning progressed, however, thoughts that a rapidly slowing jobs market will likely lead to a quicker decline in the economy and stall economic growth began to take hold. A new intra-day high was reached with the S&P 500 reaching 6532 before retracing and closing lower on the day. The bond market reacted more decisively with a quick rally that held lower yields throughout the day. Specifically, the 2-year US Treasury reached as low as 3.46% coming within three basis points of the April low following President Trump’s initial Liberation Day announcement. Naturally, the front-end of the curve should lead the way as rate cuts typically influence short-dated paper to a greater degree than the intermediate to long-end. Notably, 10-year rates, which had already pushed lower than previous support at 4.18%, decisively blasted below the next level of support at 4.12%, closing around 4.09%. The long end of the curve, as measured by the 30-year bond, dropped in solidarity with the rest of the curve, but remains more elevated on a relative basis near the 4.77% level.
The above chart highlights the much more pronounced decline in 2-Year rates compared to both 10-Year and 30-year yields over the year. Notice that 2-Year yields are lower by 73 basis points. Whereas, 10-Year paper is lower by 14 basis points, and 30-Year bonds are lower by only 1 basis point since December 31. Ongoing concerns about the independence of the Fed, increased term premium, and stickier inflation are keeping the long-end of the market higher despite the cuts to overnight lending rates.
From the Municipal Desk (with contributions from Ryan Riffe):
Despite a shortened trading week, the municipal market remained firm throughout. The market absorbed just under $8 billion in new issue supply, which was well below the weekly average of $10.6 billion. This lighter calendar helped maintain positive momentum, even in the face of a notable decline in reinvestment capital. The long end of the curve led the rally, with yields falling as much as 18 basis points by Friday’s close. It has been our belief that investor attention would eventually shift toward the long end, where ratios have consistently offered the most attractive relative value. Looking ahead, next week’s calendar is expected to tick back up to $10.6 billion. However, given Friday’s rate rally, continued inflows into municipal funds, and a drop in secondary bid-wanted activity, we believe municipals could outperform Treasuries as buyers look to lock in longer-term yields.
Municipal Ratios as a Percentage of Treasuries:
2-Yr Ratio 60%
3-Yr Ratio 61%
5-Yr Ratio 64%
10-Yr Ratio 76%
30-Yr Ratio 93%
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
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