The Market Today
Confluence of Factors Continue Pushing Treasury Yields Higher
by Craig Dismuke, Dudley Carter
THIS WEEK’S CALENDAR
Quiet Week – Investors to Focus on Treasury Supply: In a fairly light week for economic news, the market’s biggest focus this week is likely to be Treasury’s issuance. Treasury is scheduled to issue $28 billion in 2-year notes today, $35 billion in 5-year notes on Wednesday, and $29 billion in 7-year notes on Thursday. As the Fed is backing away from reinvesting the cashflows from its $4 trillion portfolio and fiscal authorities have approved surprising new levels of deficit spending (which will require increased debt issuance), investors are growing more concerned about the amount of demand with which issuance will be met. Already, the 2-year yield has nearly doubled over the past five months, from 1.25% in early September to 2.21% this morning. The 10-year yield is up from 2.04% to 2.90% during the same time. Given the already skittish appetite for Treasuries, faster expectations for growth and inflation, concerns over Fed rate hikes, a surfeit of supply, and less-and-less Fed support; events like this week’s auctions are becoming bigger risks for short-term volatility.
There are no economic reports on the calendar today. Tomorrow’s schedule brings the two most important reports of the week, January Existing Home Sales and the FOMC Minutes. The FOMC Minutes are from their January 31 meeting which took place right before the recent stock market volatility began and the run of stronger-than-expected earnings and inflation data. We expect the FOMC to hike in March and see a growing risk to them raising their SEP projections to include four rate hikes in 2018.
Overnight – Rates Remain at their Highest Levels in Years as Treasury Sets to Increase Supply: Several Asian markets remained closed for a holiday and those that were open posted mixed results. European equities are higher after teetering in and out of positive territory, but a modest 0.1% improvement has only slightly trimmed yesterday’s 0.6% loss. As U.S. markets get ready to reopen from the President’s Day holiday, U.S. equity futures are down more than 0.6%. The uneven global trends were likely less of a driver than was the U.S. rate curve moving up and adding on to last week’s gains. The 2-year yield is 2.9 bps higher to a new cycle high of 2.22%. The 5-year yield was up 3.8 bps to 2.67%, a new almost eight-year high. The 10-year yield climbed a similar 2.6 bps to 2.90%, just below last Thursday’s more than four-year high. Bill yields are also higher as the Treasury gets set to dump a healthy amount of supply into the markets. Of this week’s total $258B of new Treasury supply, $151B will be 1-year or less to maturity which, according to Bloomberg, is a single-day record for bill supply on records back to 1994.
ICYMI – February 16, 2018 Weekly Market Recap: The yield curve finished higher and flatter this year after a firmer-than-expected CPI inflation report solidified the market’s expectations for a March Fed hike. And while the 0.349% MoM increase in core CPI included a couple of items that will be hard to repeat, the more broad-based nature of the firming also stirred some concerns that the Fed may try and do even more than the three hikes currently included in December’s projections. Longer yields also jumped on the report but settled backed to little change on the week. Outside of inflation, January’s retail sales report was disappointing. The miss for January and negative revisions to the prior two months indicated the consumer closed 2017 and started 2018 a little slower than expected. However, that should have positive effects for how much dry powder consumers have to spend going forward as long as confidence remains intact. On that front, the University of Michigan’s consumer sentiment index rebounded to its second strongest level since 2004. Small business confidence also rebounded to one of its best levels on record and homebuilders’ outlook remained unchanged and elevated. Click here to see the full recap.
Another Consideration for Minimum Wage Laws (Politico): According to a Politico report over the weekend, “Wage laws are poorly enforced, with workers often unable to recover back pay even after the government rules in their favor. … That’s the conclusion of a nine-month investigation by POLITICO, which found that workers are so lightly protected that six states have no investigators to handle minimum-wage violations, while 26 additional states have fewer than 10 investigators. Given the widespread nature of wage theft and the dearth of resources to combat it, most cases go unreported.”