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Capital Markets
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4 min read
Last Week:
Prospects for an end to the pandemic by summer—bolstered by the quick rollout of the $1.9 trillion stimulus package (passed into law last week)—had risk assets feeling great despite higher interest rates.
The Treasury auctioned $60 billion two-year notes, $38 billion 10-year notes, and $24 billion 30-year bonds last week. Overall, the auctions went well. However, sometimes well-performing auctions on Tuesday, Wednesday, and Thursday result in a supply purge on Friday!
Rates on the long-end of the curve rose sharply on Friday with the 10-year breaking through 1.6%. Equities—particularly growth stocks—continued to show strong linkage to interest rates moving somewhat in lockstep with the fortunes of the Treasury market. Rotation from growth to value stocks also continues to be heavily influenced by interest rates.
Investment grade and high-yield debt continued to perform well despite the skittishness in stocks and rates. The question is—how much more can spreads tighten in the face of higher rates?
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The S&P 500 advanced 2.7% for the week, setting a new all-time high on Friday. The average daily move for the week was .74%
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The NASDAQ increased 3.1% for the week. The average daily move for the week was 1.85%.
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The two-year Treasury yield increased one basis point for the week, closing at .15% on Friday.
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The 10-year Treasury yield increased six basis points for the week, closing at 1.63% on Friday.
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The VIX Index declined 16% for the week, closing at 20.69 on Friday.
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The MOVE Index was increased 2% for the week, closing at 70.83 on Friday.
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Five-year Investment Grade Corporates (as measured by Markit CDX) was tightened four basis points for the week, closing at 53 basis points on Friday.
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High-yield corporate debt (as measured by Markit CDX) tightened 14 basis points for the week, closing at 301 basis points on Friday.
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U.S. Dollar Index was flat for the week, closing at 91.68 on Friday.
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WTI Crude was nearly unchanged for the week, using the May WTI Futures contract, closing at 65.64 on Friday.
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Gold, as measured by the April 2021 futures contract, advanced 1.2% for the week, closing at 1,719 on Friday.
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Bitcoin increased 17.5% for the week, closing at 58,138 on Friday.
The Week Ahead:
This week will be dominated by the Federal Reserve FOMC meeting on Tuesday and Wednesday. The market will give the Fed another chance to show discomfort to the rise of long-term interest rates and a slight concern over inflationary pressures. The Fed can use this opportunity to jawbone a bit of hawkishness on inflation and dovishness on long term rates (as in vague hints at more quantitative easing if rates move much higher).
However, if the tone is similar to Chairman Powell’s two weeks ago (not worried about inflation or long-term rates), we could get a continued sell off in rates. It is important to note that former Chairwoman, now Treasury Secretary Yellen, commented on Friday that the risk of inflation is small. We report that with the caveat that she is now part of the White House, as opposed to the head of the independent Fed. Nevertheless, her views are still very important and are probably simpatico with the current Fed leadership.
Definitions:
An index is unmanaged and not available for direct investment. Definitions sourced from Bloomberg.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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