Spring Showers and Tax Season

WEEK ENDING 4/5/2024

• New support level for Treasury market with 10-year yields at 4.5%.
• Strong job numbers from Friday challenge rate cuts.
• April tax seasonality generally means outflow for money markets and reserves.

A CITY DIFFERENT TAKE

Last week’s Treasuries and risk market sell-off has left the 10-year Treasury yield at a weekly average of 4.5%. In addition, the week signaled 60 basis points of rate cuts for the year. Interest rate swaps are implying two rate cuts for 2024 starting in September. Last Friday, the probability of a third rate cut was about 50%.

Now, what happens if the 10-year Treasury yield stays above 5%? Does that mean another hike is on the table? Remember that the Fed Chair spoke last week prior to the release of employment numbers and reiterated that there is a need for greater confidence that inflation moves down to 2% before cutting interest rates.

Strong job numbers on Friday continue to point toward payroll growth. Nonfarm employment numbers increased by 303,000 in March. Unemployment now stands at 3.8%. The strength in the labor market seems to be challenging the rate-cut camp. ISM numbers also supported the strength of the economy. The ISM manufacturing index rose for the first time in 18 months.

April is here and that means spring showers for those of us in the Northeast and tax filing for all. Tax season means outflows and liquidity from money markets and bank reserves in both the taxable and tax-exempt markets. Economists are predicting a good tax-receipt collection based on tight labor market conditions and positive equity performance for 2023.

CHANGES IN RATES

The Treasury market saw an increase in rates based on market reaction to strong payroll numbers.

The municipal market’s yields moved higher on the week. The market is seeing an increase in supply which acts to revalue an already rich (relative to taxable securities) municipal market.

The municipal/Treasury ratios increased last week as the municipal market was hit with a seasonal increase in new issue supply. Ratios are reflective of the increase in municipal rates for last year.

This market segment followed the Treasury markets and saw higher rates last week.

THIS WEEK IN WASHINGTON

On the world stage, all eyes are on Israel. Israel claims that it is making progress in negotiating a cease-fire in Gaza. On a phone call last week, President Biden warned Israeli Prime Minister Benjamin Netanyahu that ongoing U.S. support depends on Israel taking steps to protect civilians.

On the domestic front, the Biden administration is proposing a new initiative to relieve student debt for as many as 30 million Americans, when combined with prior actions. This is President Biden’s second attempt to offer broad student debt relief after the Supreme Court struck down his previous efforts last year.

Meanwhile, in Congress, Rep. Marjorie Taylor Greene is working on replicating former Speaker Kevin McCarthy’s exit, this time for current Speaker Mike Johnson. Greene has filed for a motion to vacate Johnson, who is facing a crisis in his party over his efforts to pass a $95 billion funding measure for Ukraine, Israel, and Taiwan.

WHAT, ME WORRY ABOUT INFLATION?

The 5-year Breakeven Inflation Rate finished the week of April 5 at 2.29%, three basis points higher than the March 28 close of 2.26%. The 10-year Breakeven Inflation Rate finished the week at 2.37%, five basis points higher than the close of March 28.

MUNICIPAL CREDIT

10-year quality spreads (AAA vs. BBB) as of March 22 were 1.22%, two basis points higher than the March 15 reading of 1.20% (based on our calculations). The long-term average is 1.71%.

Quality spreads in the taxable market are not attractive but were slightly higher, ending the week at 0.70%, two basis points higher than last week. High-yield quality spreads were 2.64% on April 5.

WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?

Money Market Flows (millions of dollars)

Money market funds saw an increase in positive cash flows. Their yields are hard to beat, even if the duration is in question.

Mutual Fund Flows (millions of dollars)

Bond funds saw a reduction in cash flows.

ETF Fund Flows (millions of dollars)

ETF Funds saw increase inflows compared to the week prior.

SUPPLY OF NEW ISSUE MUNICIPAL BONDS

Supply for the municipal tax-exempt calendar is expected to hit $8.6 billion this week.

CONCLUSION

Welcome to tax season and the cash flow seasonality that it brings for bank reserves and money market funds. Monetary policy continues to hold center stage. We have moved significantly from a six-rate-cut narrative to (now) two for the year. Strong employment and ISM manufacturing show an economy that will not roll over.

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