WEEK ENDING 2/10/2023

Highlights of the week:

  • Chairman Powell stated disinflation “has begun” and added a big “but.”
  • The Greek chorus of Fed officials that spoke in the week following Chairman Powell echoed his comments.
  • Rates moved higher; maybe the market is starting to believe the Fed?
  • The State of the Union address was the most combative and entertaining in memory.



This was another interesting week.

Chairman Powell spoke before The Economic Club of Washington, D.C. last week. In his comments, he said disinflation “has begun.” But Powell followed with, “If we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have do (sic) more and raise rates more than is priced in.”

Chairman Powell’s comments seemed to take some steam out of the bond markets' beginning-of-the-year rally. We would say the fixed income markets are beginning to believe the Fed. This week's CPI report will be a major test. As the president reminded us in his State of the Union address on Tuesday, the big infrastructure spending programs and other legislative programs from this administration's first two years are just now being implemented — and their impacts on things (such as inflation) have not yet been seen. Read more of our reaction to the wild State of the Union address below in This Week in Washington. 

The University of Michigan Consumer Sentiment Index showed that consumers think current conditions are better than the market expected (72.6 vs. 68.5), and one-year inflation expectations are slightly higher than forecasted (4.2% vs. 4.0%). All of which adds to the importance of this week’s CPI report for the markets.



Screen Shot 2023-02-13 at 11.16.39 AM

Treasury rates moved higher on the week across the yield curve. The smallest increase was in the very short portion of the Treasury market. The slope of the one-to-10-year yield curve was at -1.15% vs. last week's -1.26%.

Screen Shot 2023-02-13 at 11.16.51 AM

Rates in the municipal market also increased last week but at a much slower rate than in the Treasury market (shocking). The increase in new issue municipal supply this week may change things (read more to find out why). The one-to-10-year slope went more negative, finishing the week at -0.35 vs. The one-to-10-year slope went more negative, finishing the week at -0.35% vs. last week's -0.23%.

Screen Shot 2023-02-13 at 11.17.05 AM

One-year ratios cheapened up, but all others were more expensive on a relative basis.

Screen Shot 2023-02-13 at 11.17.19 AM

The week’s volatility was shared by the investment grade (IG) corporate market. 10-year IG corporates closed Friday at 5.21% vs. last week's 4.93%.



graphs in order (1)


We have mentioned in earlier weekly commentaries that this Congress will be “interesting,” and so far, it has not disappointed. Last week’s State of the Union address was the most combative and entertaining in our memory. President Biden put out a veritable buffet of government spending plans and set a social-spending trap, which some Republicans fell into.

In other news, the Los Angeles Times reported that the House subcommittee on “weaponization” of the Justice Department held its first hearing. We always thought smart lawyers avoided asking questions they didn’t know the answers to. Maybe these are not smart lawyers… or even lawyers?

Unfortunately for Republicans, the former Twitter executives they handpicked to serve as witnesses undermined their central thesis, testifying that they were not directed by the FBI or any other official to suppress information about Hunter Biden. The only revelation of federal interference with free speech concerned the previous administration’s efforts to get Twitter to censor Chrissy Teigen’s criticism of former President Trump.

Ready, fire, aim!



The five-year Breakeven Inflation Rate ended Friday at 2.19%, two basis points higher than the January 27 closing of 2.17%. The 10-year Breakeven Inflation Rate ended the week at 2.33%, 11 basis points higher than last week’s observation of 2.22%. This is the first time we have observed such a divergence in these readings, and we guess that this week’s CPI report will indicate which observation is more correct.



10-year quality spreads (AAA vs. BBB) were widened on the week from 0.91% to 1.32% (based on our calculations). The long-term average is 1.71%. By our way of the thinking, lower-quality securities are still not attractive but are moving in the right direction.

Quality spreads in the taxable market didn’t move much on the week, finishing at 1.18% vs. 1.14% last week. The taxable market didn’t have the same troubled press that the municipal market had.




Money Market Flows (millions of dollars)Screen Shot 2023-02-13 at 11.17.42 AM

If you are not a Prime money market fund, it looks like investors don’t like you!

Mutual Fund Flows (millions of dollars)Screen Shot 2023-02-13 at 12.26.08 PM

Looks like IG bond funds won the last period. Municipal bond funds, not so much.

ETF Fund Flows (millions of dollars)Screen Shot 2023-02-13 at 11.18.43 AM

Finally, it wasn’t a good week for bond ETFs of any ilk!



We estimate that next week’s new issue supply will be low, around $7.4 billion. If this magnitude of new issuance supply persists, the end of the January effect could be upon us.

Total new issuance supply figures of $10 billion or more usually indicate weakness in new issue supply pricing (higher yields).



We feel this week’s volatility is indicative of what’s in store for the fixed income markets in 2023. So, buckle up!

We give a lot of credence to that old saw, “Don’t fight the Fed.”


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