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Tag: treasurys

  • This week's Fed meeting could slam brakes on year-end stock rally

    This week's Fed meeting could slam brakes on year-end stock rally

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    The rally lifting U.S. stocks to fresh 2023 highs in the year’s home stretch could be at risk if the Federal Reserve on Wednesday crushes expectations for interest-rate cuts in 2024. 

    U.S. central bankers and investors haven’t exactly been seeing eye-to-eye about when the Fed will start easing its monetary policy, according to Melissa Brown, senior principal of applied research at Axioma. 

    Traders also have been flip-flopping on their forecasts for rate cuts over the past few months, based on fed-funds futures data.


    Oxford Economics/Bloomberg

    Given the whipsaw of recent volatility, it isn’t hard to imagine a jittery market backdrop as investors wait to hear from Fed Chairman Jerome Powell on Wednesday, even though the central bank isn’t expected to change its range for short-term interest rates. Since July, the Fed funds rate rate has been at a 22-year high in a 5.25% to 5.5% range.

    U.S. stocks advanced this year after a bruising 2022, adding big gains in November, as benchmark 10-year Treasury yields
    BX:TMUBMUSD10Y
    tumbled from a 16-year high of 5%. The Dow Jones Industrial Average
    DJIA
    closed on Friday only 1.5% away from its record close nearly two years ago. The S&P 500 index
    SPX
    booked its highest finish since March 2022, according to Dow Jones Market Data.

    Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

    “I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. It is mostly the expectation of Fed rate cuts next year that have supported stock and bond markets rallies recently, he said.

    The Dow Jones closed 9.4% higher on the year through Friday, the S&P 500 was up 19.9% and the Nasdaq Composite advanced 37.6% for the same period, according to FactSet data. 

    “We have been a little skeptical of the market’s excitement over rate cuts early next year,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.

    It takes a gradual process for the Fed to move away from its monetary policy tightening, Clissold told MarketWatch. The Fed is likely to pivot its tone from being very hawkish to neutral, remove the tightening bias, and then talk about rate cuts, noted Clissold.

    The bond market on Friday already was again flashing signs of a potential rethink by investors about the path of interest rates in 2024.

    Junk bonds
    JNK

    HYG,
    often a canary in the coal mine for markets, hit pause on a rally that started in late October as benchmark borrowing costs fell, even though the sector has benefited from big inflows of funds in recent weeks.

    Treasury yields for 10-year and 30-year
    BX:TMUBMUSD30Y
    bonds also shot higher Friday, echoing volatility that took hold in mid-October. 

    Read: Investors have fought a 2-year battle with the bond market. Here’s what’s next.

    Mike Sanders, head of fixed income at Madison Investments, has been similarly cautious. “I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said. It is more likely that the Fed will start cutting rates in the second half of next year, he said. 

    “I think the biggest thing is that the continued strength in the labor market continues to make the services inflation stickier,” Sanders said. “Right now we just don’t see the weakness that we need to get that down.” 

    Friday’s U.S. employment report adds to his concerns. About 199,000 new jobs were created in November, the government said Friday. Economists polled by the Wall Street Journal had forecast 190,000 jobs. The report also showed rising wages and a retreating unemployment rate to a four-month low of 3.7% from 3.9%.

    The U.S. central bank will likely “try their best to push back on the narrative of cuts coming very soon,” Sanders said. That could be accomplished in its updated “dot plot” interest rate forecast, also due Wednesday, which will provide the Fed’s latest thinking on the likely path of monetary policy. The Fed’s update in September surprised some in the market as it bolstered the central bank’s stance of higher rates for longer. 

    There’s still a chance that inflation will reaccelerate, Sanders said. “The Fed is worried about the inflation side more than anything else. For them to take the foot off the brake sooner, it just doesn’t do them any good.”

    Ahead of the Fed decision, an inflation update is due Tuesday in the November consumer-price index, while the producer-price index is due Wednesday. 

    Still, seasonality factors could aid the stock market in December. The Dow Jones Industrial Average in December rises about 70% of the time, regardless of whether it is in a bull or bear market, according to historical data. 

    See: Stock market barrels into year-end with momentum. What that means for December and beyond.

    “The overall market outlook remains constructive,” said Ned Davis’s Clissold. “A soft landing scenario could support the bull market continuing.”

    Last week the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq rose 0.7%. All three major indexes went up for a sixth straight week, with the Dow logging its longest weekly winning streak since February 2019, according to Dow Jones Market Data.

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  • A debt-ceiling deal will spark a new worry: Who will buy the deluge of Treasury bills?

    A debt-ceiling deal will spark a new worry: Who will buy the deluge of Treasury bills?

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    When the U.S. debt-ceiling fight finally is resolved, the Treasury is expected to unleash a flood of bill issuance to help refill its coffers run low by the protracted standoff in Washington, D.C., over the government’s borrowing limit.

    Treasury bills are debt issued by the U.S. government that mature in four to 52 weeks. New bill issuance could reach about $1.4 trillion through the end of 2023, with roughly $1 trillion flooding the market before the end of August, according to an estimate from BofA Global strategists.

    They expect the deluge through August to be about five times the supply of an average three-month stretch in years before the pandemic.

    “The good news is that we have a high degree of confidence around who is going to buy it,” said Mark Cabana, rates strategist at BofA Global, in a phone interview with MarketWatch. “The bad news is that it’s not going to be at current levels. Things have to cheapen.”

    Cabana sees a key buyer of bill supply unleashed by a debt-ceiling deal in money-market funds, which have climbed to nearly $5.4 trillion in assets managed since the regional banking crisis erupted in March (see chart).

    So people who yanked billions of dollars in deposits from banks after the collapse of Silicon Valley Bank in March and parked them in money-market funds could end up playing an encore performance in this year’s debt-ceiling drama.

    Money-market funds swell since March, topping $5 trillion in assets


    BofA Global

    Related: Money-market funds swell to record $5.4 trillion as savers pull money from bank deposits

    $2 trillion at Fed repo facility

    Money-market funds have been the main reason why at least $2 trillion consistently sits overnight at the Federal Reserve’s reverse repo facility. The program was last offering a roughly 5% rate, a level Cabana said new Treasury bills might need to exceed by about 10-20 basis points.

    “It’s an unintended consequence of a debt-ceiling deal getting done,” said George Catrambone, head of fixed income Americas at DWS Group, about market expectations for heavy short-term Treasury bill issuance, but he also expects money-market funds, foreign buyers and other institutions auctions to continue as buyers in the market.

    “There’s always buyers. It’s a question of price.”

    President Joe Biden and House Speaker Kevin McCarthy, R-Calif. met Monday to talk about potential ways to raise the $31.4 trillion borrowing limit and to avoid a “doomsday” scenario in financial markets if the U.S. defaults. As talks resumed Wednesday, McCarthy said, “I think we can make progress today.”

    Congress has struck deals each time U.S. public debt has exceeded its debt ceiling in the past, including by suspending it eight times since 2016 (see chart).

    In the past when the U.S. debt-limit has been violated, Congress extended or suspended it


    Refinitive, RiverFront

    That doesn’t mean financial markets have been sitting by idly. The 1-month Treasury yield
    TMUBMUSD01M,
    5.616%
    rose to 5.6% on Wednesday, while the 3-month yield
    TMUBMUSD03M,
    5.350%
    was 5.3%, according to FactSet. Bill maturing around the “X-date,” which could come as soon as June 1, have even higher yields.

    Read: Debt-ceiling angst sends Treasury bill yields toward 6%

    “Those are obviously pretty heady yields,” Catrambone said. “But it also exemplifies the market having to price in potential market disruptions in the month of June,” even though his team, like many in financial markets, expect that eventually “cooler heads will prevail” in Washington as the debt-ceiling standoff heads down to the wire.

    Stocks were lower Wednesday, with the Dow Jones Industrial Average
    DJIA,
    -0.75%
    off almost 300 points, or 0.9%, on pace for a fourth day in a row of losses, according to FactSet. The S&P 500 index
    SPX,
    -0.83%
    was off 0.9% and the Nasdaq Composite Index was down 0.9%.

    How the money ran out

    The Treasury in January hit its borrowing limit and began operating under “extraordinary measures” to avoid a default.

    Cash balances at the Treasury Department have since dwindled to less than $100 billion, according to economists at Jefferies. Barclays strategists estimate its cash balance may fall below $50 billion between June 5-15.

    “Basically, we are just draining our cash account to fund operations while we wait to figure out the debt ceiling,” said Lindsay Rosner, senior portfolio manager at PGIM Fixed Income.

    But when the battle over the debt limit ends in a resolution, she expects longer-dated Treasury yields to increase, as haven buying on fears of potentially a full U.S. government default and a credit rating downgrade will have been taken off the table.

    “The Armageddon, whatever small probability people were pricing in of catastrophe, remove that,” she said. “And that means the worst economic outcome has been removed.”

    That’s also a reason why Rosner has been avoiding ultrashort Treasurys in the eye of the debt-ceiling fight in favor of 2, 3 or 4-year bonds offering some of the highest yields in years.

    “We’re being afforded good yield, good spread, a couple of years out the curve,” she said. “Play that game.”

    Read next: How will the Fed react to the debt ceiling breach? Here are some plays in the playbook.

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  • Fed’s Bullard backs two more interest-rate hikes

    Fed’s Bullard backs two more interest-rate hikes

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    St. Louis Fed President James Bullard on Monday said he would like to see two more quarter-percentage-point interest-rate hikes this year.

    “I think we’re going to have to grind higher with the policy rate in order to put downward pressure on inflation,” Bullard said in a moderated discussion at the American Gas Association’s Financial Forum in Fort Lauderdale, Fla.

    Bullard said that the timing of the rate hikes was uncertain but that he has been an advocate of raising rates “sooner rather than later.”

    “You want to get the downward pressure while you can,” he said.

    The Fed raised its benchmark rate by 25 basis points to a range of 5%-5.25% at its meeting in May. That matches the median forecast of Fed officials for the peak interest rate in this cycle.

    Officials at the Fed are divided over whether to continue to hike rates at their meeting in mid-June or pausing to see how the economy is affected by lags from the rapid pace of hikes. Some officials don’t like the word “pause” and have described holding rates steady in June as a “skip,” because it underlines that they are not saying they are done raising rates.

    The markets think the Fed is done with rate hikes and have even been pricing in rate cuts later this year.

    Bullard said that the Fed’s forecast of no more hikes was based on its expectations of slower growth and a faster drop in inflation in the first half of the year than has been seen in subsequent data.

    “Inflation is hanging up too high,” Bullard said.

    Stocks
    DJIA,
    -0.24%

    SPX,
    +0.22%
    were set to open slightly higher on Monday, while the yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.716%
    rose to 3.7%.

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  • U.S. stocks close lower Tuesday as Treasury yields climb

    U.S. stocks close lower Tuesday as Treasury yields climb

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    U.S. stocks ended modestly lower on Tuesday, as Treasury yields rose, keeping pressure on the rate-sensitive Nasdaq Composite Index. The Dow Jones Industrial Average DJIA shed about 37 points, or 0.1%, ending near 32,394, while the S&P 500 index SPX fell 0.2% and the Nasdaq COMP closed 0.5% lower, according to preliminary data from FactSet. Stocks fell, but ended off the session lows, as the 2-year Treasury rate BX:TMUBMUSD02Y climbed 10.5 basis points to 4.06%. Bond yields and prices move in the opposite direction. Tuesday also saw a raft of relatively upbeat economic data and increased expectations by traders in fed-funds…

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