Last Week It was a tale of two worlds last week. In the rates markets, more and more participants have begun to accept as fact that the inflationary pressures being experienced in all corners of the e...
Last week marked the return of the mythical “Bond Vigilantes!” Sparked by continued improving news on the vaccine front (Johnson & Johnson fast-tracking a third effective COVID-19 vaccine), the nearing of the Democrats $1.9 trillion aid bill, and a good, old-fashioned, “Who’s going to pay for all this?” caused the long-end of the Treasury yield curve to rise in dramatic fashion.
Last week, the Treasury auctioned off $60 billion two-year notes, $61 billion five-year notes, and $62 billion seven-year notes. By the time we got to the seven-year auction, the market said, “No más.” The seven-year auction was so bad that if it had been a fight, they would have stopped it. The auction tailed over five basis points and every metric used to judge an auction was awful. The size of these auctions is about 50% higher than a just a year before, and the size of last year’s auctions were not exactly small either. Right after the seven-year auction, the 10-year yield briefly went from 1.49 to 1.60%, before stabilizing somewhat.
Two weeks ago, the selloff in fixed income was orderly. Last week devolved into panic. The jump in yields hit stocks hard, as well as knocking on super-tight Corporate, MBS, and Municipal bond spreads. We had a recovery bounce in bonds on Friday, but, while sizable in yield movement, was not much with regard to volume.
- The S&P 500 declined 2.4% for the week. The average daily move for the week was .99%.
- The NASDAQ dropped 4.9% for the week. The average daily move for the week was 1.6%.
- The two-year Treasury yield increased two basis points for the week, closing at .13% on Friday.
- The 10-year Treasury yield increased seven basis point for the week, closing at 1.41% on Friday.
- The VIX Index increased 26% for the week, closing at 27.95 on Friday.
- The MOVE Index was jumped 25% for the week, closing at 75.7 on Friday.
- Five-year Investment Grade Corporates (as measured by Markit CDX) widened five basis points for the week, closing at 57 basis points on Friday.
- High-yield corporate debt (as measured by Markit CDX) widened 20 basis points for the week, closing at 315 basis points on Friday.
- U.S. Dollar Index increased .5% for the week, closing at 90.88 on Friday.
- WTI Crude was increased 3.8 for the week, using the April WTI Futures contract, closing at 61.5 on Friday.
- Gold, as measured by the April 2021 futures contract, dropped 2.8% for the week, closing at 1,728 on Friday.
- Bitcoin dropped 13% for the week, closing at 48,835 on Friday.
The Week Ahead:
This morning yields the long-end of the Treasury curve is resuming its rise in yields. The 10-year is up four basis points, the 20-year is up six basis points, and the 30-year is up seven basis points. Equities, however, seem to be in their familiar “buy the dip” mode as the S&P and Nasdaq futures are up sharply.
The news over the weekend was mostly good, with the Johnson & Johnson vaccine getting fast-track FDA approval. Distribution figures of the existing two vaccines have also begun to improve sharply. While there has been some fretting over the possibility of corrosive inflation taking hold should the economy recover sharply and pent-up demand from households that managed to stay employed and save is unleashed, we agree with most Fed governors and presidents that any inflation will be the good kind—as opposed to the corrosive 1960s-1970s style.
What we have in fixed income is a supply problem. We believe the Fed is committed to continuing their large quantitative easing and zero interest rate policy for the foreseeable future. This does not mean that long-end yields will not continue to rise, but we do believe it will be in a mostly orderly fashion. This week, we will get February employment data on Friday.
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.
Investing involves certain risks, including possible loss of principal. You should understand and carefully consider a strategy’s objectives, risks, fees, expenses and other information before investing. The views expressed in this commentary are subject to change and are not intended to be a recommendation or investment advice. Such views do not take into account the individual financial circumstances or objectives of any investor that receives them. All indices are unmanaged and are not available for direct investment. Indices do not incur costs including the payment of transaction costs, fees and other expenses. This information should not be considered a solicitation or an offer to provide any service in any jurisdiction where it would be unlawful to do so under the laws of that jurisdiction. Past performance is no guarantee of future results.
Securities offered through SWBC Investment Services, LLC, a registered broker/dealer. Member FINRA & SIPC. Advisory services offered through SWBC Investment Company, a Registered Investment Advisor, registered as such with the US Securities & Exchange Commission. SWBC Investment Services, LLC is under separate ownership from any other named entity. SWBC Investment Services, LLC a division of SWBC, is a nationwide partnership of advisor.
John Tuohy is CEO of SWBC Investment Services, LLC, a Broker/Dealer and SWBC Investment Company, an SEC Registered Investment Advisor (RIA). In his role, John is responsible for identifying, developing, and executing the division's strategic plan and all business development, sales, and marketing activities.