Good Monday AM,
I hope you had a fantastic weekend. Stocks are down marginally and bonds are flat. I feel this is becoming more of a defensive posture heading into the last few days, a stimulus bill could be agreed upon before the election just 15days away. The yield on the ten-year rose the end of last week and before the open and is now back up to .77% Like I said, defensive. The price action has been volatile, as we have already tested both ends of the trading range. The good news is that thus far we have bounced from the bottom and currently trade in the middle of the range. When the markets are defensive, it is a good idea to stay defensive as well while these huge price swings exist, because many times this can lead to new lows in bond price (higher rates/yields).
Matt Graham did a good job sharing the likely posture for markets at this time.
Pressure is mounting for the bond market. After a period of intensely calm, narrow trading throughout September, 10-yr yields quickly moved to challenge recent range boundaries heading into October. There are known risks on the horizon, with the presidential election and fiscal stimulus being the two biggest flashpoints. Should we assume additional momentum toward weaker levels is simply waiting for a few of these shoes to drop?
That depends. Of the two flashpoints, only stimulus carries an obviously negative connotation for the bond market. There are two reasons for this. On one hand, stimulus hurts bonds to whatever extent it helps the economy (a stronger economy supports higher rates and encourages investments to shift toward riskier assets like stocks). On the other hand, stimulus is directly funded by the issuance of more Treasuries, and more issuance = higher yields, all other things being equal. Of course markets know that stimulus will arrive eventually, but the longer it’s delayed, the more time the economy has to sustain damage and the more time the Treasury market has to trade without another glut of record issuance.
The election is a flashpoint that can go either way–not just in terms of who wins, but more importantly in terms of how markets would react. The prevailing narrative seems to be that a Biden victory would be bad for rates. But I’ve also heard Biden would be bad for stocks. Given the amount of cash on the sidelines at the moment, I’m not sure both sides of the market are going to sell-off at the same time. I won’t pretend to be able to predict the reaction, and you probably shouldn’t listen to anyone who does.
Another consideration is that the bigger market reaction may well have to do with the potential for unified control of the House and Senate. This makes good sense, but even then, there’s one narrative where unified control leads to rampant spending, higher stock prices/bond yields, and another narrative where higher taxes cause stocks to tank and Treasury revenue to improve (thus helping rates). There are too many variables in play to assume we know how markets will ultimately react, not the least of which being the path of the pandemic.
One of the unintended consequences of forbearance, Americans’ credit scores are rising. The average FICO credit score stood at 711 in July, up from 708 in April and 706 a year earlier. People are able to kick the payment can down the road and scores are going up… sure.. that makes sense… and anyone wonders why credit boxes tighten.
On the same line of thought, last Friday, the Mortgage Bankers Association (MBA) released a report that found 8.5% of renters, or 2.8 million households, missed, delayed, or made a reduced payment during the third quarter, while 7.1% (3.4 million homeowners) missed their mortgage payment. Is it comforting to know that credit scores are being protected?
Please remain safe and healthy, make today great!
