FOMC meeting and a somewhat weaker than expected jobs report last week

After the FOMC meeting and a somewhat weaker than expected jobs report last week, fixed-income markets are now focused on PPI and CPI due out next week on Tuesday and Wednesday respectively.

Yields for the benchmark ten-year treasury bond dropped approximately 15 basis points immediately after the release as prices rose and held their gains for a strong weekly close. Ten -year treasury yields have remained lower all week, trading between 4.50% and 4.45% after touching 4.72% before the jobs data release last Friday.

High-grade tax- exempt municipal bonds also caught a bid, falling 7-9 basis points--arguably an easier feat as municipal issuance has remained restrained while treasury issuance continues to explode. Prices for high-grade munis remain historically rich to treasuries, recently trading at roughly 60% of the treasury yield curve for ten-year maturities. Some yield relief for munis may be in sight given the 10 billion in new issues on the way, including 1.8 billion of Illinois G.O.s, according to the new issue calendar.     

This is an election year.   Although the Fed may lean toward lowering interest rates, any such change in policy remains “data dependent.”   Currently, a resilient economy, robust consumer spending, and corporate earnings that have mostly beaten estimates, auger for the “high- for- longer” interest rate narrative, especially while inflation remains sticky.  However, if next week’s releases suggest that inflation may be waning, the rate cut narrative will of course regain popularity.

Last week’s jobs data may have been the start of unemployment becoming a larger influence of Fed policy with the potential for a cooling of economic conditions in coming months. Oil prices, influenced by the current geopolitical environment as well as economic conditions at home and abroad will also weigh heavily on the inflation situation. Record credit card debt—now 60% higher than the national average---will no doubt also have an impact at some point.

So what’s a fixed -income investor to do? T-bill and chill? Extend duration? Continue to buy short to medium- term municipals, despite historically low yields versus treasuries? Buy A-rated intermediate-term, investment grade corporate bonds with yields 100 basis points over treasuries? 5-year insured CDs at 20 basis points spread to treasuries? 5.50% 30-year Ginnie Mae pass-throughs with an 8-year average life near par??

 At this point, with the fixation on inflation numbers and such a seemingly binary outcome depending upon the strength or weakness of next week’s PPI and CPI, one consideration is to invest a portion now among various securities/duration until greater clarity emerges.  One thing is certain, with 6 trillion on the sidelines, any sign of inflation abating could ignite one heck of a rally.

Sources:

Bloomberg, Federal Reserve, Bureau of Economic Analysis