The Pendulum Swings

WEEK ENDING 5/3/2024

• Weekly rate volatility—markets tend to overreact.
• How do you unite Democrats and Republicans?
• A job nobody should want.

A CITY DIFFERENT TAKE

Last week was a pretty exciting week in the fixed income markets. We realize the previous sentence is a non-sequitur, but bear with us. The markets had to deal with a Federal Reserve meeting on Wednesday followed by a presser (shock no action was taken regarding the Fed Funds rate). The 10-year Treasury bond closed Tuesday night at 4.68%, close to the yearly high-water mark reached on 4/25/2024 of 4.70%. The S&P 500 closed on 4/30/2024 at 5,035. No doubt both markets were expecting bearish comments coming from the Fed. After all was said and done, many pundits viewed Chairman Powell’s comments as dovish; however, we viewed them as consistent. The Fed will remain data-dependent as it charts the future course of the Fed Funds rate.

Some higher inflation numbers (ISM Prices Paid reported at 60.9 vs. 55.8 last month and expectations of 55.4) came out on the same day as the Fed meeting. These were followed by weaker employment indicators, such as the JOLTS Job Openings release of 8.488 M, lower than expectations of 8.680 M and lower than the revised February number of 8.813 M. The quits rate (this concept tracks voluntary job separations initiated by the employee) was reported to be 1.9%, below its 20-year average of 2.0%, continuing its recent decline. However, as we measure the time series, it is still within the fair range, just lower.

ISM Price paid index, another inflation measure, was released on 5/1/2024. It came in much higher than expectations, and last month’s release was 60.9 vs 55.4 and 55.8, respectively. The 10-year Treasury bond closed on 5/1/2024 at 4.629%.

All this was a precursor to Friday’s Jobs release. The unemployment rate was 3.9%, higher than last month’s, and the expectations were 3.8%. There were 175,000 jobs created vs the previous month’s revised 315,000. Year-over-year average hourly earnings increased by 3.9%, lower than last month’s 4.1% and the expectations of 4.0%. The 10-year Treasury bond closed on Friday at 4.51%, a three-week low.

The markets were expecting the worst and were relieved at something less. This, however, does not mean inflation and the risk of a stronger-than-expected economy are behind us. Like the Fed, we remain data-dependent, and one data point does not make a trend.

CHANGES IN RATES

Treasury rates moved lower on the week. Short-term rates decline slightly more than long-term rates, causing the Treasury curve to steepen slightly. Investors can still receive about the same income as a 10-year Treasury bond by buying a 5-year Treasury at about 50% of the duration risk.

The municipal market’s yields moved lower on the week. They are less than Treasury yields, and we hope they catch up a bit to their Treasury equivalents. Investors can still receive about the same income as a 10-year AAA Municipal GO bond by buying a 5-year AAA Municipal GO at about 50% of the duration risk.

Next week, we expect a significant increase in new issue supply, which should put upward pressure on municipal rates relative to Treasury rates.

The municipal/Treasury ratios increased across the yield curve.

Corporate rates were mixed over the week.

THIS WEEK IN WASHINGTON

We envision this platform as a way to share our views on the markets and world events, which are even more interrelated today. We believe our audience should know how we think about the world and its effect on the markets. This proves much harder to do in certain cases because the issues are so complex. We are closely following and debating the conflict in the Middle East and the spate of recent college demonstrations to determine their impact on world markets (having such a diverse team adds a lot of depth to these respectful conversations). While we have strong views, we don’t feel we can do such a significant topic justice in this format. Sometimes, it’s better to stick to issues that are easier to summarize.

Back to politics - South Dakota Governor Kristi Noem has found a way to unite Democrats and Republicans over their reaction to the reported shooting of her 14-month-old puppy:

“Washington — South Dakota Gov. Kristi Noem said on Sunday that she's "not retracting anything" after facing backlash for stories about killing her young dog and a false claim about meeting with Kim Jong Un, although she said the latter story will be adjusted in her book.”

"I'm so proud of this book and what it will bring to people," Noem said on "Face the Nation" on Sunday. "I'm not retracting anything."

When in doubt, double down! Maybe she doesn’t know about the first rule of holes: STOP DIGGING when you find yourself in one! It makes you long for the good old days when Sarah Palin said, “I can see Russia from my house.”

Back in the House of Representatives, GOP Rep. Marjorie Taylor Greene announced Wednesday she will force a vote over House Speaker Mike Johnson’s ouster next week – a move that comes after Democrats have said they will vote to kill the effort and ensure Johnson doesn’t lose his job.

It’s time to stop writing before this section gets even more depressing…

WHAT, ME WORRY ABOUT INFLATION?

The 5-year Breakeven Inflation Rate finished the week of May 3 at 2.35%, 0.07% lower than the April 26 close of 2.42%. The 10-year Breakeven Inflation Rate finished the week at 2.35%, eight basis points higher than the close of April 26.

MUNICIPAL CREDIT

10-year quality spreads (AAA vs. BBB) as of May 3^rd were 1.14%, unchanged from the April 26 reading (based on our calculations). The long-term average is 1.70%.

Quality spreads in the taxable market are not attractive and ended the week lower at 0.67, equal to the 4/26/2024 level. High-yield quality spreads were 2.78%, 9 basis points lower than the April 26 reading.

WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?

Money Market Flows (millions of dollars)

Money market funds saw an increase in cash flows.

Mutual Fund Flows (millions of dollars)

Bond funds cash flows were mixed.

ETF Fund Flows (millions of dollars)

All ETF asset classes saw inflows.

SUPPLY OF NEW ISSUE MUNICIPAL BONDS

The supply of new issues is expected to exceed $10 billion this week, making things interesting.

CONCLUSION

We expect the volatility to continue in the fixed income markets and, like the Fed, will be data-dependent on our investment choices. We believe that the best value for the risk can be found in the shorter part of the fixed income market. The center point is around a maturity of five years.

IMPORTANT DISCLOSURES
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