Halyard’s Weekly Wrap – 01/21/22

Happily, there’s been a dearth of Central Bank speeches this week, and that’s been mostly good for the bond market. Last week the investment community worked to digest the possibility of four rate hikes this year. We remain skeptical that the Fed is able to endure the pressure such a string of rate hikes would exact on the equity market. In fact, we wonder how the fed is feeling about the 7% year-to-date drawdown of the S&P 500. At any rate, we’ll know next Wednesday afternoon as the Fed concludes their first Open Market Committee meeting of the new year. As we’ve written recently, historically the Fed, having admitted that inflation has proven more stubborn than anticipated and with an economy going gangbusters, would tighten policy immediately.

Halyard’s Weekly Wrap – 01/07/22

For the second month in a row the employment reports told two conflicting stories. The establishment survey came in at less than half of consensus expectation at 199,000 new jobs, while the household measure registered 651,000 new jobs in the month. That measure was enough to push the unemployment rate down to 3.9%, and within a “chip shot” of the post financial crisis low of 3.5%.  That comes on the back of the surprisingly hawkish minutes of the December 15th Fed meeting. Not only did the minutes solidly indicate a March liftoff in Fed Funds, the committee apparently had a meaningful discussion on the appropriate size of the Fed balance sheet under normal circumstances and how fast they would allow a runoff of maturing securities. 

December 2021 – Monthly Commentary

For the second month in a row the non-farm payroll and the household employment reports have diverged. The establishment survey came in at less than half of consensus expectation at 199,000 new jobs, while the household measure registered 651,000 new jobs for the month. That measure was enough to push the unemployment rate down to 3.9%, and just above the post-financial crisis low of 3.5%. That comes on the back of the surprisingly hawkish minutes of the December 15th FOMC meeting. Not only did the minutes solidly indicate a March rise in Fed Funds, the committee apparently had a meaningful discussion on the appropriate size of the Fed balance sheet under normal circumstances. That discussion included how fast they would allow a runoff of maturing securities. The minutes failed to detail a targeted amount, but it’s certainly well below the current balance of $8.2 trillion. They did indicate that a “substantial buffer” is the likely target. Also, some participants favor a complete runoff of the Fed’s mortgage-backed holdings in favor of Treasury debt. That last point could become problematic in a rising rate environment. Mortgage-backed securities are negatively convex, which is to say that as interest rates rise the duration extends. In a rising interest rate environment home owners are less likely to refinance and the pace of maturing MBS would slow, perhaps materially.

Halyard’s Weekly Wrap – 12/23/21

The week started with the markets panicky that the omicron variant was going to drive the world back into lockdown, but that fear has subsided going into the last trading day of the holiday shortened week. The long bond is challenging the high yield of the month, trading at a yield-to-maturity of 1.90%, but still solidly below 2.0%. Economic data this week, all secondary in importance, continues to point to a robust economy. Investors seem to be turning a blind eye to three projected rate hikes, as the S&P 500 is again within basis points of another all-time high.