WEEK ENDING 2/07/2025
- Eagles soar past Chiefs to win Super Bowl.
- Treasury Secretary Bessent wants to bring 10-year bond yield down.
- Mixed employment data supports Fed’s wait-and-see.
A CITY DIFFERENT TAKE
Fly, Eagles, fly! Your Philadelphia Eagles dominated the Kansas City Chiefs 40-22 in one of the more lopsided Super Bowls of all time. You could argue it was the second biggest “diss track” of the night. Now, the Chiefs hit the offseason with looming retirements and questions about their dynasty. Will they ever ever ever get back together? Can Patrick Mahomes shake it off? We might know in a fortnight or after a cruel summer of training camp.
The new Treasury Secretary Scott Bessent is now firmly three weeks into his new job. Of note for the bond market is his message that he wants to keep the 10-year bond yield lower than it is currently. He intends to do this without any repression measures and promises not to intervene with regards to the Federal Reserve which controls the front end of the Treasury curve — all while maintaining good growth for the economy.
Why is the 10-year Treasury rate so important and in focus?
It is an important indicator of private borrowing activity like corporate borrowing which affects the capital markets. In addition to that, consumers’ home mortgages are priced at this level. As of last week, 10-year Treasury ended at 4.49%. The bond market is flashing an expensive borrowing cost for the government.
Secretary Bessent is going to continue former Secretary Yellen’s plan of issuing shorter-dated bonds. We are not sure how issuing new debt would help lower the borrowing cost. The Congressional Budget Office estimates that the national debt will be close to 120% of GDP by 2035. For those curious, our current debt levels are close to roughly 100% of GDP. To maintain the current level, we would require spending cuts and tax increases.
Neither option is likely at the moment.
Bessent’s 3-3-3 plan aims at reducing federal deficit by 3%, generating 3% GDP growth, and boosting U.S. oil production by three million barrels a day to 16.5 million barrels a day. This would lower energy prices and support less inflation. Federal deficit would be reduced by the Department of Government Efficiency (DOGE) bringing about spending reduction.
It seems like it is game on between the Treasury Secretary and the bond market.
Last week was also marked by the release of U.S. nonfarm payroll data. The number increased 143,000 month-over-month in January. The unemployment rate remained steady at 4%. However, hourly earnings continue to rise month over month by 0.5%. We read this to mean that the Federal Reserve will feel vindicated in its decision to hold rates. A strong labor market coupled with uncertainty surrounding tariffs will support the Fed’s wait-and-see approach.
CHANGES IN RATES
Rates in the Treasury market were lower week over week.
Interest rates in the municipal market also declined significantly week over week.
The muni-Treasury ratio tightened even further, making munis slightly richer.
Corporate yields trended higher inside of five years and came down between 10 and 30 years.
THIS WEEK IN WASHINGTON
We turn to the dizzying tariff situation. The president announced but delayed his 25% levies on Canada and Mexico. The outcome so far has been a modest accommodation by both these countries on issues such as illegal immigration, fentanyl smuggling, and trade deficits.
At present, China has been subject to only a 10% levy.
Reciprocal tariffs will be on the agenda this week. The plan is to levy ‘the same exact tariff for any country that charges a duty on U.S. goods. Today, the president is expected to also announce 25% tariffs on all imports of steel and aluminum.
Talk about a delicate situation! Trade wars have historically done more harm than good. We’ll have to wait and see how this one plays out.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Feb. 7 at 2.25%, 5 basis points lower than Jan. 31. The 10-year Breakeven Inflation Rate finished the week at 2.42%, unchanged week over week.
MUNICIPAL CREDIT
As of Feb. 7, 10-year quality spreads (AAA vs. BBB) were 0.80%, 8 basis points tighter from the prior week (based on our calculations). The long-term average is 1.69%.
Quality spreads in the taxable market are not attractive. They ended the week at 0.80%, 2 basis points tighter than the prior week. High-yield quality spreads were 3 basis points wider at 2.54% week-over-week.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds saw an increase in inflows compared to the week prior.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds increased week-over-week across categories.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced a decrease in net flows.
SUPPLY OF NEW ISSUE MUNICIPAL BONDS
The supply of new issues is expected to be closer to $11.3 billion this coming week. The annual average is approximately $11 billion.
CONCLUSION
Uncertainty regarding tariffs continues. Mixed employment numbers and uncertain tariff policies mean that the Fed is comfortable holding rates as is for now.
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