- With the 10T surging again, it should dampen economic growth. A month ago, we indicated that the 10T and all T Bills could solve Powell's problem with inflation. Many on the street now believe that if the T Bills continue this path or stay at these levels, it will eliminate the need for a rate hike. The rate substitution for policy change will depend on policymakers' confidence that the increase in these rates will slow down the economy…. Some, including me, believe it will. Bottom line - do we need a rate increase with the T markets doing what they are doing? To my point, the 10-year T has increased by 50bps since the September meeting.
- US retail sales increased in September, suggesting that households continue spending money. The value of retail purchases increased by .7%, better than expected by 10%. This figure is what has been driving rates the last couple of weeks. Yields on MUNIs are becoming "increasingly attractive." Putting money to work here is hard to ignore; 5.00% gets most accounts a 7.90% taxable equivalent. When you weigh the alternatives, this is “attractive” and makes for a compelling story.
- Another FOMC member (Bank of Richmond) indicated yesterday the FED should consider "holding where they are at" to let the policy change soak in. Thomas Barkin said the FED has "time" to determine if the moves have worked and should not be too hasty to continue to raise rates. These FOMC members feel the economy will show weakness as we move into 2024, slowing down inflation on its own.
- Financial firms are reporting profits (Goldman and BOA), and citing their bond trading is helping. With the current volatility, it is rightly so; transactions are up for these firms, while profit is also up slightly. It is time to take advantage of these sloppy opportunities in these markets. I suspect we will continue to see 5% + for a while out long, but also consider looking at shorter or mid-range paper; you will be surprised where that paper is trading.
- Yields are 300bps higher than they were 1.5 years ago. If you are waiting for "higher yields," they are here now. One day, this will end, and we will be back to 3%. I will not pretend to know when that is, but until then, take advantage of the volatility.
- Trading in the MUNI market is surging as more individuals are buying paper. Volume jumped to over 80K trades a day on October 4th, the highest ever. We see around 70K daily trades, about 15% higher than average. What does this mean? Retail is buying bonds. MUNI bond shops are moving paper due to the recent market activity.
- As indicated a few weeks ago, visible supply will remain heavy for October as issuers want to get their deals priced and sold before the holidays. Visible supply today will start the week at $13.6B, well above the average of $9.2B. As long as the visible supply remains heavy, deals will be priced to sell, meaning higher yields.
Bottom line:
Yields are up 20bps in a matter of two weeks, maybe quicker. Fixed income continues to be under pressure, and this is carrying over into the equity markets. If you are waiting for 5%, it is here. If you are waiting for 4.80% for short paper, that is here, too. We recommend continuing to put money to work here, knowing yields might increase a bit; however, no one knows. If you can live with 5%+ insured paper, this is a great time to be a buyer.
At The DRL Group, we specialize in helping high-net-worth investors maximize tax-free returns by proactively maintaining their custom bond portfolios through all market conditions.
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David Loesch
dloesch@drlgroup.net
605-B Park Grove
Katy, TX 77450
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New Edge Securities, Inc. has no affiliation with Bond Desk Trading LLC, Bond Trader Pro, Tradeweb Direct, Bondpoint, TMC, or any other ECN. Yield to call (YTC) does not indicate total return; this yield is valid only if the security is called. Bonds may or may not be called or be callable on multiple dates or, in other cases, called on any date following the first call date, so yield to call is based on the earliest stated call date. Discounted bonds may be subject to capital gains tax. Bonds may be subject to OID (Original Issue Discount). Prices and availability may change at any time without notice. Do not buy discount bonds based on the Yield to Call (YTC). Insured bonds are issued for timely payment of principal and interest only. Insured bonds do not cover potential market loss and are subject to the insurance company's claims-paying ability. Non-rated (NR), With-Drawn (WR), or below investment grade bonds, lower-rated bonds carry a greater potential risk of default & should be considered by sophisticated investors only. Bonds may be subject to capital gains tax. This summary is for informational purposes only and is not an offer or solicitation for the purchase or sale of any security or a recommendation or endorsement of any security or issuer. New Edge Securities, Inc. and DRL Group make no representation about the accuracy, completeness, or timeliness of this information. Bonds could also be subject to the DeMinimis Rule; please consult your tax advisor for further clarification.
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