Entries by halyard

Halyard’s Weekly Wrap – 12/09/22

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December is a tricky time for the capital markets as banks, brokers, and investors all endeavor to close the year with their respective portfolios 100% invested. Carrying cash over “the turn”, as year-end is colloquially referred to, is not acceptable in the capital markets. As a result, markets can become volatile to the point of seeming irrational. This year that irrationality is most evident in the Treasury Bill market. We refer to the soon to mature December 15th Treasury Bill, although the entire nearby Bill market has also been volatile. The Dec 15 Bill yielded 3.15% at the close of November but ended the day yesterday yielding 2.39%. Logically, that makes no sense. The overnight Fed Funds rate corridor is 3.75% to 4.00%, and the Fed Reserve Repo program offers a set 3.80% rate for the institutions that qualify for the program, and yet the near-term Bill curve continues to be in disarray as we approach the end of the year. One needs to look no farther than the “Calculated New Cash/Pay Down” section of the Treasury Direct website to understand why. Between December 6th and December 13th the Treasury paid down $76 billion in Bills; that’s to say that they sold $76 billion Fewer Bills than the amount maturing. In effect, the Treasury tipped the supply/demand of Treasury Bills out of balance which has resulted in wild gyrations in the Bill market. The Treasury will refill their coffers somewhat next week with net new cash of $64 billion when they sell the new 3-year, 20-year and 30-year securities, but that should not solve the Treasury Bill imbalance. As a result, we expect Treasury Bills to continue to trade rich to the Fed Funds target and the Reverse Repo program into year end.

November 2022 – Monthly Commentary

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Judging by the November Consumer Price Index, the Fed’s harsh medicine of higher interest rates is starting to work. While year-over-year CPI still rose 7.1% last month, that’s down from 7.7% in October, and the 0.1% month-over-month increase is exactly what the Fed has been expecting. While the November Producer Price index came in higher than expected, that measure of inflation takes a back seat to CPI in that some of those price pressures can be absorbed by margin compression at the corporate level. The CPI, on the other hand, directly impacts consumers and risks the spiral effect in which consumers expect prices to continue to rise into the foreseeable future.

Halyard’s Weekly Wrap – 12/02/22

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This has been the kind of week that nimble traders love and position traders hate. The two main drivers of volatility this week were Chairman Powell’s speech before the Brookings Institute and the November employment report. The result has been a wildly vacillating rates market. The two-year note started the week at 4.44% but plunged to 4.23% on Thursday before retracing some of the move to close the week at the mid-point of that range. The 30-year followed the same path, opening the week at 3.72% before dipping down to 3.60%.

Halyard’s Weekly Wrap – 11/25/22

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The Federal Reserve released the minutes of their last Open Market Committee meeting at 2:00 p.m. on Wednesday, the afternoon before Thanksgiving. There are a few days on the calendar when liquidity is razor thin and Thanksgiving eve is one of them. The minutes were particularly anticipated as several Fed speakers had recently hinted at reducing the magnitude of the rate hikes going forward. That suspicion was affirmed in the “Participants View” section. The exact quote was “…a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” The key words in the quote were “substantial majority.” Remember, committee votes do not need to be unanimous; a simple majority is required, and a substantial majority tells me that they have that. We interpret that statement as the Fed communicating that the December hike will not be 75-basis points, with a 50-basis point hike more likely. The minutes also acknowledged that rate hikes impact the economy with a lag, and they are starting to see evidence of slowing. But any hint of policy action in the New Year was avoided entirely.

Halyard’s Weekly Wrap – 11/18/22

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The Federal Reserve has aggressively raised rates this year beginning in March – with 6 consecutive increases in the overnight target rate. The Fed has gone from 0% to 3.75% in eight months and is expected to increase rates another 50bps to 4.25% at its upcoming FOMC meeting on December 14th. Fed Fund futures markets expect a terminal rate of 5.06% by June 2023 – implying another 75bps are in the pipeline over the next six months.

Halyard’s Weekly Wrap – 11/11/22

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Finally, a downward bias to the Consumer Price Index! That’s not to say that prices are contracting. In fact, taking it at face value, the inflation numbers are still too high. But the rate of increase is falling, which is welcome news for consumers. Core CPI, the measure that excludes food and energy, rose 6.3% year-over-year, falling from a year-over-year increase of 6.6% last month. On a month-over-month basis the measure rose 0.3%, down from 0.6% last month. That’s a welcome improvement and comes just in time for the Fed.

October 2022 – Monthly Commentary

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The short maturity fixed income market is offering the most attractive yield opportunity since before the financial panic of 2008, thanks to the Federal Reserve’s aggressive reversal of Fed Funds. We argue that the Fed has been forced into such an aggressive move by their years of ineptitude but, nevertheless, the move presents an attractive opportunity for investors to actually earn an attractive return on their cash. Prior to this year, the idea of 60/40 investing (a portfolio strategy of holding 60% of assets in equities and 40% in fixed income) had been supplanted by “forget bonds and buy the dip in stocks when their price corrects.” That strategy worked well prior to this year, but has proved catastrophic for portfolios this year, with the selloff in the darlings of the retail market, namely FANG stocks. All are down double-digits in 2023, with META, the parent of Facebook, down 69% from its peak. The best performing of the group is Apple with a year-to-date loss of only 27%. Topping the FANG losses, Bitcoin, the favored trading vehicle of the more “sophisticated” retail traders has lost 75% of its value since last December. With the cryptocurrencies printing new lows as we write, we wonder what’s stopping Bitcoin from plumbing the depths below 10,000. It’s certainly not valuation, because it really doesn’t have any intrinsic value.

Halyard’s Weekly Wrap – 11/04/22

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The Fed’s well publicized “leak” hinting that the Central Bank would raise the Fed Funds rate by 75 basis points this week, but that another hike of equal magnitude in December meeting was not a certainty proved at least partially correct. The committee did raise rates by 75 basis points and, with it, offered a new sentence to the statement: “In determining the pace of future increases in the target range, the committee will take into account the cumulative tightening of monetary policy…” It was a written acknowledgment that the committee realizes that they have already tightening aggressively and, importantly, policy change works with a lag. However, Chairman Powell’s tone 30 minutes later, at the post-meeting press conference, was decidedly hawkish. We weren’t the only managers to be fooled by the head fake. Bond traders immediately took rates higher. May 2023 Fed Fund futures had rallied to 4.805% on the day of the “leak,” but have since reversed and are closing out the week at 5.12%. Similarly, the 2-year note which traded down to recent low of 4.30% reversed violently and are closing out the week at roughly 4.71%, the high for the year.

Halyard’s Weekly Wrap – 10/28/22

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Last week’s Fed leak that they would consider slowing the trajectory of rate hikes at the November 2nd FOMC meeting continued to dominate trading this week. Consensus seems to be developing that the recent softening of economic data will force them to temper their hawkishness and will raise the overnight rate 75 basis points next week and another 50 basis points in December. Reflecting that, the 5-year note fell to 4.06% before closing the week at 4.18%, on the back of a stellar auction on Wednesday. The auction cleared at 4.192%, through the presale when-issued yield of 4.21. The bid to cover rose to 2.48 times versus 2.27 times at the last auction, indicating that demand was high

Halyard’s Weekly Wrap – 10/21/22

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A Wall Street Journal story released this morning suggested the Fed would raise rates by 75 basis points at the November FOMC meeting but would then evaluate the need and magnitude of a December rate hike. The market had been anticipating 75 basis point hike at each of the meetings. As we’ve seen in the past, most notably in June when the Fed leaked that they intended to raise rates by 75 basis points, the Fed will leak their intentions in an effort to prepare the market for a change. Whether it was a deliberate signal or cover for St Louis Fed President Bullard’s ethical gaffe, the market heard it loud and clear. The two-year note fell 14 basis points on the day as did Fed Fund futures. The peak in Fed Fund futures continues to be May 2023.