WEEK ENDING 9/20/2024
- Fed “recalibrates” and cuts rate range by -0.50%.
- BOO! Halloween and the “Cash Trap” are approaching.
- Muni and Treasury curves steepen. Is this the beginning of the long road to “normal”?
A CITY DIFFERENT TAKE
What a week! The Federal Reserve surprised the market with a -0.50% cut in the Fed Fund rate range. The market’s reaction was a dip in stocks on Wednesday (the announcement day) and a resurgence on Thursday. Friday brought a slightly lower S&P 500 Index (-11.09) and slightly higher Treasury yields (the 10-year Treasury note finished Friday at 3.74%).
By our way of thinking, the current economic data indicates a solid economy. The Atlanta Fed’s GDPNow forecast of Q3 GDP reached 2.9% on September 18, down from 3.0% on September 17. The only problematic spots are the real Fed Funds rate (a 20-year high at 2.73% based on Core PCE readings of 2.60% before the latest Fed move) and a softening employment picture. Nonfarm payrolls have been positive but muted for a few months with significant downward revisions for multiple months. The Feds new policy view can be characterized as:
“Powell characterized the Fed’s latest cut, which lowered the benchmark federal-funds rate to between 4.75% and 5%, as “recalibrating policy down over time to a more neutral level.” While he has typically avoided offering specific pronouncements about where that might be, he volunteered on Wednesday that “the neutral rate is probably significantly higher than it was” before the pandemic.”
In addition to the aforementioned market moves, the Treasury yield curve continued to slope more positively. The Treasury yield curve has been inverted (short rates higher than long rates) for almost two years, maxing out at -2.00%. The Treasury curve became positively sloped on September 6, when the spread between 2-year and 10-year Treasury securities reached +0.06%. As of Friday’s close, that spread was +0.15%.
CHANGES IN RATES
Treasury yields were mixed on the week, led by the short end of the curve. The result of these moves was a further steepening of the Treasury yield curve.
Investors in money market funds should get ready for what this “recalibrating” means for them. Below is a list of short-term Treasury securities and their yield changes for the month of September. This is a proxy for money market yields; money market funds have an average maturity of around 30 days:
We have been warning about the “Cash Trap” for some time. Money market investors should prepare themselves for significant yield reductions.
The municipal curve did not move last week.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, were mostly lower over the week.
Corporate yields were mixed on the week, led by the short end of the market.
THIS WEEK IN WASHINGTON
The presidential election is really expanding this section. Or maybe it’s just this week. Here’s a quick rundown of five stories tied to the election:
- Harris appeared with Oprah for an internet sit-down.
The New York Post ran the following headline, “Kamala Harris gets called out by Oprah Winfrey for dodging question at Michigan campaign event, again offers no proposals”
“WASHINGTON — Kamala Harris on Thursday night attended a star-studded campaign event hosted by Oprah Winfrey, who was forced to nudge the vice president to get to the point during a rambling response to a policy question posed by the audience.” - Trump blamed a potential loss on Jewish voters — at a “fighting antisemitism” event, of all places.
“WASHINGTON — In remarks ostensibly focused on combating antisemitism, former President Donald Trump questioned why he lacks commanding support from Jewish voters and suggested that they would have “a lot to do” with a loss in November if their support for his campaign does not grow.” The Jewish populace makes up 2.4% of the U.S. population.
“Trump received about 74 million votes in the 2020 presidential election, according to the Federal Election Commission. That's almost 47% of the popular vote.”
It just doesn’t seem like the math works! Then again never let the facts get in the way of a good line. - The Trump family started a new family business.
On Monday night, during a livestream on X, Donald Trump unveiled his latest business venture: World Liberty Financial. It’s basically a crypto stock exchange where you can borrow, lend and invest.
“Alongside Trump, founders include Donald Trump Jr., Eric Trump and Barron Trump, according to a person briefed by a member of the group’s founding team. Now, it’s not like Trump himself is running this business. The company has a disclaimer noting it’s not owned or managed by the Trumps. It does note, however, that they can get paid.
“Another man involved in the Trumps’ venture is Chase Herro. As reported by Bloomberg’s Zeke Faux, Herro is a self-described “dirtbag” whose business ventures include weed, weight loss colon cleanse and get-rich-quick courses. In 2018, Herro summed up the crypto business by remarking, “You can literally sell s––– in a can, wrapped in p–––, covered in human skin, for a billion dollars if the story’s right, because people will buy it.” - The Mayor of Springfield rebuked a Trump visit.
“The Trump campaign continued to push false claims about Haitian immigrants in Springfield, Ohio, even after a top city leader told a campaign staffer for its vice presidential nominee ahead of this month’s presidential debate the rumors were “baseless,” the city’s mayor said, confirming a Wall Street Journal report.”
“SPRINGFIELD, Ohio (WCMH) — One day after former President Donald Trump announced his intention to visit the Ohio city that has become the center of the immigration debate in the country, the mayor asked him to reconsider.” - Disturbing posts made by NC’s Republican gubernatorial candidate were removed.
“Offensive posts by North Carolina Lt. Gov. Mark Robinson were removed from the pornographic website Nude Africa on Thursday, hours after a CNN KFile investigation revealed a series of inflammatory comments posted on the forum by the controversial and socially conservative Republican nominee for governor of North Carolina.”
Mark Robinson has denied these allegations, calling them “fake” and generated by “artificial intelligence.” This may be true, but the denials sound awfully “Weiner-esque.”
A summary of the multiple national polls by FiveThirtyEight Interactives as of September 21 show Vice President Harris with a slight lead in the general election (48.3% to 45.6%). Americans polled by the same organization show an almost split view of the vice president’s favorability (46.7% favorable, 46.6% unfavorable). The same poll for Donald Trump as of September 20 showed a +10 unfavorable rating (42.7% favorable, 52.7% unfavorable).
On the international front, a Mideast cease fire is now but a dream to the Biden Administration. Israel pulled off a stunning pager and walkie-talkie attack on Hezbollah in Lebanon. That was followed by a bombing that took out several Hezbollah operatives, including one responsible for the planning of the Marine barracks bombing in Beirut 40 years ago. There were significant civilian causalities. Admiral James Stavridis now believes the risk of an expanded Mideast conflict has risen to 20% from 10%.
We will try not to editorialize. If we did, compliance (doing a fine job as usual) would reprimand us. But the hits keep on coming. All this, in addition to the Fed’s reduction of the Fed Funds rate by -0.50%... what do the next six weeks hold?
Oh, to live in interesting times!
WHAT, ME WORRY ABOUT INFLATION?
The 5-year Breakeven Inflation Rate finished the week of September 20 at 2.02%, 19 basis point lower than the close of September 13. The 10-year breakeven inflation rate finished the week at 2.15%, seven basis points higher than the close of September 13. We guess this means good things for short-term inflation, but not so good in the long run.
MUNICIPAL CREDIT
As of September 20, 10-year quality spreads (AAA vs. BBB) were 0.94%, six basis points tighter than the September 13 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 at 0.89%, three basis points lower than the week prior. High-yield quality spreads were 22 basis points lower at 2.96%.
WHERE ARE FIXED-INCOME INVESTORS PUTTING THEIR CASH?
Money Market Flows (millions of dollars)
Overall, money market funds saw lower cash flows. Tax-exempt funds saw an increase in flows from the week prior.
Mutual Fund Flows (millions of dollars)
With the exception of municipals, bond fund categories’ cash flows were negative for the week reporting September 18.
ETF Fund Flows (millions of dollars)
ETF asset classes all experienced increased inflows.
SUPPLY OF NEW ISSUE MUNICIPAL BONDS
The supply of new issues is expected to be about $14.1 billion this week, a much higher number than in recent weeks.
CONCLUSION
This was a big week. The Federal Reserve reduced the range for the Federal Funds rate by -0.50%. Short Treasury rates went down, and long Treasury rates increased. The yield curve steepened. Municipal rates did almost nothing, still recovering from a continued supply shock. Next week’s new issue supply is slated for $14.1 billion. The -0.50% caught some, including us, by surprise. We will not be changing our strategic view of the market. The yield curve is finally positively sloped but has a long way to go before it resumes its normal shape.
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