What a week we just had.
To quickly recap:
Not quite Ghostbusters-level “Dogs and cats living together! Mass hysteria!” But buckle up. It promises to be a volatile summer. Markets hate uncertainty, and this may give them enough fuel for a rocky start this week.
CHANGES IN RATES
Treasury yields were higher over the week.
The 2–10 year Treasury curve slope was steady last week, closing the week at -0.27%, the same as the July 12 close.
Municipal yields were marginally lower last week, closer to unchanged. In addition, the yield curve continued to steepen last week. The yield spread for a 1-year AAA Municipal GO bond went from -0.18% on July 12 to -0.15% on July 19. Out with the new normal and in with the old normal.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, richened last week. Bloomberg ran a story headlined “Muni Funds See Biggest Inflow Since May as Rate-cut Bets Build.” Avoiding the “Cash Trap” or setting up for a potential summer rally?
Corporate yields were higher over the week, in line with the Treasury markets.
We were wrapping up the weekly commentary when the news broke that President Biden would not run for re-election. Whether he decided to put the country first or was pushed out, many interesting questions arise.
Finally, Sen. Robert Menendez, a Democrat from the great state of New Jersey, was convicted on all 16 counts of bribery and extortion; he says he is not resigning. I will not leave. For those keeping score of part-time New Jersey residents’ felony counts, it’s Menendez – 16, Trump – 34.
The 5-year Breakeven Inflation Rate finished the week of July 19 at 2.46%, which was higher by 13 basis points from the close of July 12. The 10-year breakeven inflation rate also finished the week at 2.32%, which is eight basis points higher than the close of July 12.
As of July 19th 10-year quality spreads (AAA vs. BBB) were 1.05%, three basis points lower than the July 12 reading (based on our calculations). The long-term average is 1.70%.
Quality spreads in the taxable market are not attractive. They ended the week three basis points higher at 0.75%. High-yield quality spreads were 14 basis points lower at 2.91%.
Money Market Flows (millions of dollars)
Money market funds saw positive cash flows (except for the Tax-Exempt category) over the week. The cost of “cash trap” insurance is getting richer.
Mutual Fund Flows (millions of dollars)
Bond fund categories saw mostly positive cash flows.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced an increase in cash flows overall.
The supply of new issues is expected to be about $9.9 billion this week, continuing the heavy tax-exempt supply.
When the week started, it looked like the Fed was preparing to cut short-term interest rates. The market, as it usually does, overreacted and attached higher implied probabilities of a rate cut starting in September.
Sunday’s announcement that President Biden will not run for re-election adds some spice to this stew. Markets hate uncertainty, and we will see how they react to this uncertainty in the next few weeks. The yield curves have steepened over the last few weeks, and the cost of “Cash Trap” insurance has richened. We plan to maintain our neutral duration targeting and continue to overweight the short end of the relative investment universes of our SMAs.
Not since 1968 have we seen a president eligible for re-election drop out of the race. We survived that, and we will survive this. The best advice we can offer is to not deviate from your investment plan and to get ready for volatility.
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