Taking a Pause to Give Thanks

Taking a Pause to Give Thanks


WEEK ENDING 11/17/2023

  • Fed’s dovish tone and positive inflation data knock yields off their peak.
  • Government debt sales continue to climb.
  • Happy Thanksgiving! “Thankfully,” we’re taking a pause from writing next week.



October's CPI showed meaningful progress toward lower inflation. Our favorite summation of the Federal Reserve's current policy comes from a tweet by Nick Timiraos of The Wall Street Journal: "The first rule of mission accomplished is that you never say mission accomplished." While there are tones of cooling inflation and a pause from the Fed, Chair Powell recently insisted that the Fed had not yet made up its mind about whether to continue to pause at the December meeting. But market participants refuse to believe the Chair. The CME FedWatch Tool puts the probability of rates remaining the same at 99.8% with a 0.2% probability of an ease.

As we line up all the data, it does support a pause. Ten-year treasury yields have stopped pushing higher and remain between 4.4% and 5%.

A closer examination of the data shows the following.

  • A big slide in October ISM numbers, suggesting the goods side of the economy is cooling. Services trended downward as well but remained robust.
  • Employment slowdown also offers support for the pause. Nonfarm payrolls only increased by 150,000. The unemployment rate rose a smidge from 3.8% to 3.9%. (Keep in mind 48,000 members of the United Auto Workers union went on strike.)
  • CPI changes were also respectable, trending in the right direction. 

While these three data points make a case for a pause, remember we are not yet at 2% inflation. There is a concern that the economy and labor market are both strong, which is why the FOMC participants have not committed to a long pause. We think the markets are premature in their optimism that the Fed is done raising rates.

The markets are pricing a $16 billion sale of 20-year Treasuries and are having indigestion absorbing supply in a shortened holiday weekend. The 20-year auction could be at risk as last week’s 30-year auction was tepid.



Screenshot 2023-11-20 at 11.51.05 AM

Treasury yields moved significantly lower last week, driven by what the market perceived as an inflation-friendly CPI report. Y/Y core CPI came in at 4%, ten basis points below expectations. The market may have perceived this as a friendly report, but markets tend to overreact. Core CPI is still well above the Fed’s 2% target.

Screenshot 2023-11-20 at 11.51.26 AM

The overreaction to the CPI report was not limited to the Treasury market. Couple that with the seasonal reduction in the supply of new issue municipal bonds ahead of January, and you have a volatile combination.

Screenshot 2023-11-20 at 11.51.48 AM

The municipal/Treasury ratios are lower and, in some cases, have broken through breakeven levels.

Screenshot 2023-11-20 at 11.52.31 AM

Corporate yields moved mostly lower last week; corporates joined the party.



graphs in order (1)

Reuters earlier this week published a story titled “Forever war: Israel risks a long, bloody insurgency in Gaza.” Unfortunately, the situation in the Middle East seems to be inching toward that direction. And as Kyiv endured a second successive night of drone attacks, it’s clear the Russia-Ukraine war also does not have an end in sight.

The Senate passed and the President signed a stop gap funding bill that keeps the government running through early next year. Despite this success in the two chambers, President Biden's rating is at an all-time low, driven by the perception of his handling of foreign relations. Both wars weigh heavy on his reelection campaign.



The 5-year Breakeven Inflation Rate finished the week at 2.33%, three basis points lower than the November 10 close of 2.36%. The 10-year Breakeven Inflation Rate finished the week at 2.28%, matching the November 10 close.



The 10-year quality spread (AAA vs. BBB) as of November 17 was 1.35%, ten basis points higher than the November 10 reading of 1.25% (based on our calculations). The long-term average is 1.71%.

Quality spreads in the taxable market are not attractive but were narrower last week, ending the week at 0.84%. High-yield quality spreads moved from 3.49% on November 10 to 3.47% on November 17.



Money Market Flows (millions of dollars)Screenshot 2023-11-20 at 12.03.18 PM

Mutual Fund Flows (millions of dollars)Screenshot 2023-11-20 at 12.03.29 PM

ETF Fund Flows (millions of dollars)Screenshot 2023-11-20 at 12.03.38 PM




This week’s supply estimates are slated for somewhere around $330 million. A slow holiday week in the muni market.



This is a slow holiday week with the 20-year Treasury auction being the highlight for the markets. Slowing inflation print has had an outsized reaction in both the bond and the stock market. However, we still don’t see the inflation threat completely subsiding; the hesitation from Fed officials to commit to a long pause reflects that.

Finally, we’d like to wish you a very happy Thanksgiving. We’re incredibly thankful for your readership and your trust in CDI. We’re off from writing next week, but we’ll be back December 4 with an all-new Week in Review.


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