WEEK ENDING 2/14/2025
- Fixed income seems immune to headlines.
- “Patience is a virtue; possess it if you can.”
- Inflation seems untamed.
- The purges continue.
A CITY DIFFERENT TAKE
Last week concluded with the release of January’s payroll numbers. Nonfarm payrolls came in higher than expected (158,000 compared with an expected 111,000), and December’s number was revised higher (273,000 adjusted from 223,000). At the close of business, the 10-year Treasury bond was 0.06% higher in yield.
CPI and PPI were also released this week. On Wednesday, core CPI came in higher than expected (3.3% versus an expectation of 3.1%) and higher than December’s reading of 3.2%. The current administration blamed the previous administration. Eggs were up 15% on the month and 53% from a year ago.
The PPI report was released the following day and followed a similar trend. Year over year, core PPI was 3.6%, higher than the expected 3.3%. Last month’s reading was revised upward (3.7% adjusted from 3.5%). Inflation is proving to be sticky.
Federal Reserve Chair Powell testified before Congress last week and Barron’s headline says it all:
“Powell Urges Patience on Rates, Says Inflation Needs to Slow Down Before Cuts”
Headlines for the week ending Feb. 14 included an announcement from the Trump administration about “reciprocal tariffs.”
“President Donald Trump doubled down on his extraordinary push for more balanced trade, ordering on Thursday that agencies should investigate plans for new reciprocal tariffs that could boost America’s revenue — but could also ignite a global trade war and add to America’s rebounding inflation problem.
Howard Lutnick, Trump’s Commerce Secretary nominee, said he anticipates the investigation will be complete by April 1. It is then up to Trump to decide, as of April 2, when to enact any of the new recommended tariffs, he said.” Tariffs, Tariffs come and get your Tariffs
Meanwhile, the purges continue:
“CNN — Scores of firings have begun at federal agencies, with terminations of probationary employees underway at the Department of Education and the Small Business Administration, federal employees and union sources told CNN on Wednesday.”
Moving this fast, no possible mistakes could happen, could they?
“WASHINGTON − The Trump administration rescinded firings of hundreds of employees at the National Nuclear Security Administration, which oversees the nation's arsenal of nuclear weapons, in a reversal that has fueled scrutiny over Elon Musk's efforts to cut the federal workforce.
A spokesman for the Department of Energy, which the semi-autonomous NNSA falls under, told USA TODAY less than 50 workers had their jobs terminated. About 325 NNSA workers initially received notices late last week that they had been laid off, according to Reuters.
The dismissals are part of Trump's wave of mass firings throughout the federal workforce, engineered by Musk's Department of Government Efficiency. The original notices prompted one senior NNSA staff member Friday to issue a public call to action before the terminations were halted.” OOPS
Michael Lewis wrote a book, “The Fifth Risk,” about the damage Trump 1.0 did to meaningful federal agencies. It is an informative and very scary read.
The addition of tariffs on top of a seemingly strong economy may make inflation harder to tame, delaying future rate cuts by the Fed. The fixed income market’s implied probabilities of rate cuts are under 50 percent for each Fed meeting in 2025. Last year at this time, the implied probabilities of rate cuts from the June meeting forward ranged from 57.1% to 77.3%. Yes, the Fed lowered rates by 1.0% in 2024, but the Fed chair is now tempering the market’s expectations.
CHANGES IN RATES
The Treasury market took the week’s news well, barely changing. The slope of the yield curve, as measured by the yield spread between the 2-year maturity and the 10-year maturity, increased by 0.01% (0.20% versus 0.21%). Maybe the market is becoming immune to all the announcements and tweets. Let’s hope the sky does not eventually fall!
Interest rates in the municipal market were muted on the week despite a significant new issue calander.
The muni-Treasury ratio loosened up a bit, making munis slightly less rich.
Corporate yields were also muted on the week.
THIS WEEK IN WASHINGTON
We covered most of the important announcements in the introduction, but to recap: reciprocal tariffs; Powell urges patience; purges of the federal workforce continue; and eggs are getting more expensive.
We are actively trying to set these headlines to Billy Joel’s “We Didn’t Start The Fire.” Stay tuned.
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of Feb. 14 at 2.24%, 1 basis point lower than February 7. The 10-year Breakeven Inflation Rate finished the week at 2.43%, 1 basis point lower week over week.
MUNICIPAL CREDIT
As of Feb. 7, 10-year quality spreads (AAA vs. BBB) were 0.78%, 2 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 0.78%, 2 basis points tighter than the prior week. High-yield quality spreads were 4 basis points tighter at 2.50% 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 most categories.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced an increase in net flows.
SUPPLY OF NEW ISSUE MUNICIPAL BONDS
The supply of new issues is expected to be closer to $4.3 billion this coming week, compared to the weekly average of approximately $11 billion.
CONCLUSION
We spoke with an advisor this week who told us his clients do not like the word “volatility” because it connotes fear. He instead describes this market as “bouncy.” Volatile or bouncy, it doesn’t matter — a rose by any other name. The news was all over the place but decidedly negative for fixed income markets (our interpretation), which, in turn, took the news in stride. We don’t know if it was the anticipation of the long weekend or not, but we get very nervous when markets are this calm in the face of such news.
A view from the lighter side:
- Speaking at the Washington Press Club Foundation Annual Congressional Dinner, Sen. Amy Klobuchar showed off her sense of humor, even if it swings from the gallows:
“Speaking of Greenland, there’s a question for you that I want to pose. What is the difference between Greenland and Donald Trump? Greenland is not for sale,” joked Klobuchar of a president who’s found a friend in the constitutional chaos-making donor Elon Musk and other tech billionaires.
The punchline got a sea of boos from the D.C. crowd, and Klobuchar was ready to hit back at the president’s supporters.
“OK, for any Republican Trump administration person out there, they want to throw eggs at me as a result of that joke. You can’t, because they’re too expensive,” said Klobuchar with a chuckle.” Is this Funny?
- Taylor Swift was booed by the Philadelphia faithful at the Super Bowl. She was a one-time resident of Reading, Pa., but this should come as no surprise. Remember, this is the same fan base that threw snowballs at Santa Claus (some loaded with batteries for extra heft). It’s all a matter of perspective, however. As a longtime resident of Philadelphia and its suburbs — and an Eagles Fan (with a capital F) — all Chris can say is, “Stay classy, Philadelphia.”
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein are available upon request.