Halyard’s Weekly Wrap
our thoughts on the past week’s market activity, economic releases, and Federal Reserve commentary
09/25/26 –
The price action in the bond market this week has been nothing short of shocking. The two-year Treasury note is yielding 4.87%, 15 basis points higher than last Friday’s close and 56 basis points higher than where it was trading on the first of the month. Similarly, the 30-year bond is yielding 5.49%, 19 basis points higher on the week and 30 basis points higher since September 1st.
The catalyst was the release of the S&P purchasing manager surveys on Tuesday. The service and manufacturing surveys were much higher than expected and the composite survey came in at 58.4, the highest level in 5 years.
Further contributing to the bearish sentiment was the parade of FOMC members speaking publicly, with their warnings about inflation, and commenting that the overnight rate will need to be raised multiple times. Following last week’s rate rise, the conventional wisdom seemed to
have settled that the Fed would raise the overnight rate one more time and then be done. Fed fund futures are now indicating that the overnight rate will be approximately 100 basis points higher by next June.
Behind the scenes the bearish sentiment carried over into the 5-year, and 7-year note auctions. On Wednesday the $70 billion 5-year note auction was met with tepid demand. The auction cleared at 5.033%, a yield that was 3.10 basis points above where it was trading at auction time. That yield differential, or “tail” in bond parlance, was the second highest on record.
What’s remarkable is that the debacle that transpired in bonds had little impact across the broader capital markets. The S&P 500 continues to trade just below its record high, the dollar is modestly higher, and gold is modestly lower. That the equity market didn’t react to the spike in rates is especially surprising. The spike is likely to impact growth, which in turn is likely to impact profits.
Next week will bring a close to the third quarter and the BLS will make a quick turnaround and release the September jobs report on October 2nd. The expectation is that there will be little give back to the surprisingly strong August report, and that 100,000 jobs were added in September. The unemployment rate is expected to remain at 4.1%.
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.
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Halyard’s Weekly Wrap – 4/21/23
/in Weekly Wrap/by halyardTo put in trading desk parlance, we were “Unched” this week! That pretty well sums up trading activity. The 2-year note was 9-basis points higher in yield and the 30-year bond also drifted higher, but only by 5-basis points. The S&P 500 traded lower by less than 1%. Economic activity, for the most part, came right on the screws, with housing starts and existing home sales reports in line with forecasts.
Halyard’s Weekly Wrap – 4/14/23
/in Weekly Wrap/by halyardFollowing the Federal Reserve-induced banking crisis that gripped the capital markets last month, much debate has focused on the next course of action. Clearly, the Fed’s sharp and relentless rise in interest rates, and negligence of its regulatory responsibility contributed to the demise of Silicon Valley Bank and Signature Bank. From that, an argument can be made that they should pause from any additional rate hikes to evaluate their action to date. If for no reason other than to let any banks that extended duration too soon generate some net interest income. However, an equally persuasive argument is that the inflation mentality is starting to become entrenched. From our perspective, there were three big hurdles to overcome to justify raising rates at the next meeting, and all of them have flashed a green light for the Fed. The employment report, the consumer price index, and the producer price index all portrayed an economy that is slowing, but by no means is falling off a cliff. That should be enough to give them room for at least another 25-basis point hike.
Halyard’s Weekly Wrap – 4/7/23
/in Weekly Wrap/by halyardInterest rates continued to trend lower this week led by the intermediate sector as early economic data supported a Fed pause.
The following economic data releases supported the view that the US was nearing a recessionary environment:
• Manufacturing and Service Surveys(ISM) both came in weaker than expected and softer than the previous month
• Job openings fell to 9.9 million from a revised 10.5 million for the month of February
• Factory orders and Durable goods posted weaker readings
Halyard’s Weekly Wrap – 3/31/23
/in Weekly Wrap/by halyardThe flight to quality abated from the panic of mid-March, but there is a tremendous amount of money that has gone to cash. The Fed’s overnight reverse repo (managers lend to Fed, the Fed pays interest) attracted its 3rd highest total since inception – $2.4 trillion. Money Market Fund assets swelled to a record of $5 trillion. The dash for cash resulted in outsized moves higher in price for bonds and notes in the Front end. For example, the one month bill (4/11/23 maturity) was trading at 4.58% on March 9th – just before SVB meltdown. The same Bill (4/11s) traded as low as 3.55% on March 27th , and is now closing today at 4.77% as the worst fears of continued bank contagion have subsided.
Halyard’s Weekly Wrap – 3/24/23
/in Weekly Wrap/by halyardWe thought that the Federal Reserve would have held the overnight rate steady at the conclusion of this week’s FOMC meeting, but we were wrong! The Fed raised the overnight rate by 25 basis-points, taking the range to 4.75% to 5.00%, the ninth consecutive rate hike. In his press conference, Powell essentially said that the banking sector is fine and that markets should expect another rate increase.
Halyard’s Weekly Wrap – 3/17/23
/in Weekly Wrap/by halyardAnyone with children under 12 years-old understands the concept of the participation trophy (or has at least watched the Bluey Episode titled “Pass the Parcel”). In an effort to make sure that all participants feel good about themselves, everyone gets a trophy. For the younger kids, quite often the parents discourage keeping score or even declaring a winner. This week felt like it was trophy day for the banking system. The first trophy went to Silicon Valley bank for their mismanagement of their hold-to-maturity book, by establishing a duration that suffered a significant loss of value from the Fed’s draconian rate hikes to date. The FDIC, which guarantees deposits up to $250,000, on Sunday evening announced that the guarantee would be extend to all depositors regardless of the size of their deposit. As has been communicated, many of the deposits were the working capital of promising, albeit not yet profitable, start-ups. Start-ups that should their break-through prove successful, hold the winning lottery ticket to hundreds of millions or billions of dollars.