Halyard’s Weekly Wrap – 10/22/21
Fed Chairman Powell ended the week by delivering a “wishy washy” overview of the economy and monetary policy at a virtual panel discussion. In fairness, he avoided using the word “transitory” to describe the rising prices that have consumers loudly complaining. Instead, he characterized inflation as being elevated and will likely stay that way for a bit longer. He did acknowledge what we learned from the minutes of the last FOMCC meeting that taper will begin soon and conclude next summer.
Meanwhile the Bank of England shocked investors by communicating that they will be raising the overnight rate in the near-term, and perhaps as soon as November 4th. The reaction in the secondary market was an immediate move higher in interest rates with the 2-year Gilts rising 20 basis points on Monday. Investors are betting that this will not be a one and done rate hike either. The futures market is pricing in 100 basis point rate rise by next September.
You would be forgiven for assuming that UK stocks broadly retreated on the news, but you would have been mistaken. The FTSE flirted with an all-time high all week before closing 0.53% below that mark.
While Powell was careful to avoid suggesting that a rate hike in Fed Fund is anywhere in the foreseeable future, we get the sense that fixed income investors are not buying it. The 2-year note yield continues to drift higher, closing the week at 0.46% and the one year forward rate is indicating that the one-year rate will hit 1% one year from now. Similarly, the 10-year note continued its upward trajectory, hitting 1.70% before closing out the week at 1.66%. That price action is the likely cause of the disastrous 20-year note auction on Wednesday. The auction cleared at 2.10%, 2.5 basis point away from where it was trading at auction time. In the Treasury market, the to be auctioned note is traded for several days before the actual auction occurs, in what is known as the “when issued” market. Through this methodology, the Treasury hopes that there is no surprise at auction time. A sloppy auction is not what they want to see. This is the third sloppy auction this year and the Fed is likely to be mildly concerned as they begin to taper their open market buying. The fixed income community has begun to ask themselves if this sloppiness will become the norm when the Fed is gone.
This commentary is being provided by Halyard Asset Management, L.L.C. and its affiliates (collectively “Halyard” or “we”) for informational and discussion purposes only and does not constitute, and should not be construed as, investment advice, or a recommendation with respect to the securities used, or an offer or solicitation, and is not the basis for any contract to purchase or sell any security, or other instrument, or for Halyard to enter into or arrange any type of transaction as a consequence of any information contained herein. Although the information herein has been obtained from public and private sources and data that we believe to be reliable, we make no representation as its accuracy or completeness. The views expressed herein represent the opinions of Halyard Asset Management, LLC, or any of its affiliates, and are not intended as a forecast or guarantee of future results. Past performance is not indicative of future results.