WEEK ENDING 3/14/2025
- Another week, another “State of Confusion”
- This week’s numbers
- Odds of “stagflation” are increasing
- Shameless plug: check out our latest bond blog
A CITY DIFFERENT TAKE
Before reading this, we suggest you put on The Kinks’ “State of Confusion” album (or whatever audio medium you prefer).
Volatility in both the stock markets and bond markets has increased in the first 50+ days of the new administration’s tenure. Volatility, as measured by Bloomberg’s Historical Volatility Table for the 10-day S&P 500 Index, increased from 16.759 on Jan. 21 to 24.179 on March 14 (a 44.3% increase). The S&P 500 Index touched technical correction territory before recovering about 675 points on Friday. (A technical correction, often called a market correction, is a decrease in the market price of a stock or index that is greater than 10% but lower than 20% from the recent highs.)
Stocks tumble on Thursday, pushing the S&P 500 into a 10% correction.
Given the amount of decline, time will tell if this recovery is more than a “Dead Cat Bounce.” (A “Dead Cat Bounce” is a temporary recovery of asset prices from a prolonged decline or bear market that's followed by a continuation of the downtrend.)
Then again, what do we know? We are bond people. And bonds have been volatile all year. The Treasury 4-5/8% as of Feb. 15 traded from a low 10-day volatility of 11.983 to 21.482 on March 14. The volatility high was 25.295 on Feb. 18. The total returns year-to-date through Friday, March 14, by index are as follows:
The above table highlights the benefits of bonds in a well-diversified portfolio of stocks and bonds. Not to be self-promoting but we explain more in our latest blog and video on our website.
Last Week’s Numbers
Tuesday gave us the first indication of potential labor market strength. All these releases were pre-DOGE layoffs, and those are still in question:
Trump Must Reinstate Fired Federal Workers at 6 Agencies, Judge Rules
“The firings are part of a broad effort by the Trump administration to shrink the size of the federal workforce. Around 100,000 workers have either agreed to resign or been fired to date, with another 400,000 expected to be let go through upcoming reductions in force.”
“Previous efforts to slow the downsizing of the federal government have had mixed results, with most wins only temporary. Thousands of Agriculture Department workers terminated in February were reinstated on March 12 after they were granted a 45-day stay by the federal agency that reviews employee complaints. They will receive all back pay, and the department ‘will work quickly to develop a phased plan for return-to-duty,’ according to a USDA statement.” State of Confusion
The following table highlights some of the key labor market indicators:
Why is the Job Openings per Unemployed Person problematic? Because Treasury Secretary Bessent is expecting the (potentially) jobless federal workers to be absorbed into the private sector. With only 0.9 job openings per unemployed person, that absorption rate may be too optimistic. A detox could last longer.
Treasury Secretary Bessent says a ‘detox’ period for the economy does not have to be a recession
“We have excess employment in the government, and those people can be moved to the private sector,” Bessent said. Absorption Rate May be Less than they thought
The CPI reading was the big one for the week.
Inflation Cooled to 2.8% in February, Lower Than Expected
“Inflation cooled last month, but the latest data may offer less comfort to U.S. businesses, consumers, and Federal Reserve policymakers than it otherwise would because tariffs are threatening to raise some prices in the months ahead.”
“Stocks jumped at the opening bell, then gave up some of their gains. Analysts warned that an encouraging inflation print wasn’t enough to make up for the tariffs uncertainty. Moreover, details of the report suggested that Fed policymakers might not be as relieved by it as investors initially hoped.”
“Economists are struggling to keep up with the recent tariff news, but are pushing up their inflation estimates nonetheless. Goldman Sachs economists last week raised their forecast for the Commerce Department’s core inflation gauge to 2.9% in the coming fourth quarter from a year earlier. That compared with a previous estimate of 2.4%.”
“But Wednesday’s report largely predates President Trump’s recent tariff actions, which means the full effect of the new tariffs will be captured only in future reports.” Inflation Up or Down
The release garnered less of a reaction than we thought, only an increase of 3 basis points in the 10-year Treasury yield. We believe the muted reaction was because the market was pricing in the tariff effect on future inflation.
Current Inflation Measure + Tariff Impact > 2.0% (Fed Target)
The tariff effects are anybody’s guess, but we feel that if the trade war continues, it will add to inflation.
On Friday, the market received the last of the week’s economic releases: University of Michigan Consumer Sentiment. The Wall Street Journal headline read:
Consumer Sentiment Tanks as Americans Expect More Pain Ahead
Uncertainty around the economy, stocks and jobs take toll; ‘Horrific’ A Self Fulfilling Prophecy
All this uncertainty and data is leading us to the conclusion that economic slowdown or recession are not the only two potential outcomes. In addition to this data, the M2 reading on Jan. 1 shows that the money supply as measured by M2 is 1.78 standard deviations above its 20-year average, and the velocity of M2 (the rate at which it turns over) is on the rise. Both are needed to spawn inflation. To put that in English, there is a lot of money in the system, and it is being used. The probability of a “stagflation” outcome (a period of high inflation, slow economic growth, and high unemployment occurring simultaneously) is growing.
CHANGES IN RATES
The week-over-week changes in Treasury yields are quite muted, but they hide much intra-week volatility. The yield curve measured between the two-year and 10-year Treasury securities flattened a bit, going from +0.33% last week to finishing this Friday at +0.29%.
Interest rates in the municipal market moved higher on the week as seasonally high new issue bond offerings came to market. The higher yields were needed to place these deals.
Relative yield ratios reflect the difference in yield changes for the two fixed income markets.
Corporate yields were higher on the week.
THIS WEEK IN WASHINGTON
Congress averts government shutdown. YEEEEAHHH!
Congress averts government shutdown after Senate passes stopgap funding bill
“The Senate passed a bill Friday evening to fund the government into the fall, avoiding a shutdown just hours before a midnight deadline.” Long Term Financial Planning at Its Best
On Tuesday, the president met with CEOs of America’s largest companies. The long and short of the meeting was summarized in the following Reuters article:
Trump defends tariffs before corporate America as stocks sell-off
• Business Roundtable has pushed for an end to Trump trade war
• Meeting follows US stock market sell-off
• Companies try to size up Trump's economic impact
• Trump maintains approach on tariffs, says they could rise
Is Trump Throwing It Away?
This opinion piece in the WSJ seems to indicate so.
“His tariff circus undermines U.S. standing just when it would be most useful.”
“A few short weeks have seen Mr. Trump, to continue his favorite metaphor, scattering his best card to the winds. The U.S. has been the best-functioning, most innovative economy in the world at a time when its rivals and partners are all struggling for different reasons.”
“He’s throwing it away with his tariff policy.”
In addition to this meeting, the president asked for “military options” to ensure America’s access to the Panama Canal.
Pentagon tasked with providing ‘military options’ to ensure US access to Panama Canal, memo says Didn't Carter give the Zone away
And do we really need Greenland?
Trump tells NATO chief the US needs Greenland Need or Wants
Maybe it’s time to change the tunes. Even though she is Canadian American, Alanis Morissette’s “Ironic” seems appropriate. If you enjoy a little gallows humor, the following CNN story fits the bill.
Trump official tasked with defending DOGE cuts posted fashion influencer videos from her office
“As the Office of Personnel Management oversaw the layoffs of thousands of federal workers and pressed others to justify their positions, the agency’s chief spokesperson repeatedly used her office for a side hustle: aspiring Instagram fashion influencer.” So Busy
So, to answer the question, “What five things did you accomplish at work last week:”
- Sold a $475 purple skirt.
- Sold shoes.
- Sold a blouse.
- Sold a belt.
- Fired 10,000 federal workers who didn’t use their time at work efficiently.
Yes, that is “Ironic.”
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of March 14 at 2.12%, 2 basis points lower than March 7. The 10-year Breakeven Inflation Rate finished the week at 2.30%, 3 basis points lower week-over-week.
MUNICIPAL CREDIT
As of March 14, the 10-year quality spreads (AAA vs. BBB) was 0.91%, 7 basis points wider than 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 0.96%, 5 basis points wider than the prior week. High-yield quality spreads were 27 basis points wider at 3.08% week-over-week.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds saw decreased flows in two out of three categories.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds were negative week-over-week across most categories except municipals, which was down significantly as well.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced negative flows. ETF fund flows are tied to the rate volatility that Treasuries are currently experiencing.
SUPPLY OF NEW ISSUE BONDS
The supply of new issues is expected to be closer to $10 billion this coming week. The municipal market has to digest $20+ billion in positive net supply for the next three months. The backdrop against this issuance is Treasury market volatility, budget discussions, and tariff uncertainties.
CONCLUSION
The “State of Confusion” continues. In these volatile markets we are maintaining our neutral duration stance and will tactically remain overweighted to the shorter end of our SMA investment universes. We will focus on our value measures when constructing our clients’ SMAs.
IMPORTANT DISCLOSURES
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