Last week saw a significant sell-off in both Treasuries and municipal bonds markets. But the next 10 days will feature very important data releases.
Job openings release this Tuesday. Core PCE (the Federal Reserve’s preferred inflation number) releases Thursday. And the unemployment report releases on Friday. In addition, November 5 is Election Day and November 7 is when we expect the Fed’s next interest rate decision. Market volatility will remain elevated in this next 10-day period.
Basically, the market is nervous to see where macro-data for the economy and the election results shake out in terms of tariffs and inflation implications. Corporations are punting big commitments until after the election outcome.
It is not surprising that, given the uncertain backdrop, liquidity in the investment grade and municipal markets might be shaky. Both markets are poised for one last push of issuance before the election. They are also similar in the fact that they are experiencing tight credit spreads. They are vulnerable, however, to repricing surrounding any volatility spikes with regards to the presidential election. This would include delays in vote counting or a contested election.
October’s employment data will be difficult to interpret because of the noise surrounding the hurricanes. Initial claims data and the Fed’s Beige Book both show a strong labor market. With the economy showing strength, the expectation for Q3 GDP is around 3.2% for the last quarter. However, this week’s number should confirm the standing of the economy.
CHANGES IN RATES
Treasury yields moved significantly higher last week.
The municipal curve kept up with the Treasury curve and moved higher for all tenors.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, cheapened with the most widening in the 5-year and 10-year maturities.
Corporate yields were significantly higher week over week.
The final full week of campaigning has started for both presidential candidates. Vice President Harris started her week campaigning in Philadelphia. Former President Trump kicked off the week at a contentious rally in Madison Square Garden.
In a survey conducted by Emerson College, voters’ top issue continues to be the economy (45%), followed by immigration (14%), threats to democracy (14%), abortion access (7%), healthcare (6%), and crime (4%). The same survey shows Harris and Trump tied 49%-49%.
The 5-year Breakeven Inflation Rate finished the week of October 25 at 2.26%, 13 basis points higher than the close of October 18. The 10-year Breakeven Inflation Rate finished the week at 2.29%, two basis points higher than the close a week prior.
As of October 25, 10-year quality spreads (AAA vs. BBB) were 0.95%, five basis points tighter than the October 25 reading (based on our calculations). The long-term average is 1.70%.
Quality spreads in the taxable market are not attractive. They ended the week at 0.79%, one basis point lower than the week prior. High-yield quality spreads were three basis points lower at 2.77%.
Money Market Flows (millions of dollars)
Overall, money market funds saw high inflows compared to the week prior.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds were mixed on the week. Significant among these were outflow in municipals.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced increased inflows.
The supply of new issues is expected to be about $10.4 billion this week. We believe that supply will slow down after the election. Same for the U.S. high-grade market; bond sales are slated to be around $20 billion.
We’re entering a truly volatile 10-day period for the markets. With both corporate and municipal markets poised for a big issuance week, liquidity will be tested. Data releases confirm the state of the economy, while the election will show the impacts of immigration, the economy, and tariffs.
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