Good Friday morning from your Hometown Lender,
Bonds are actually holding well today despite yesterday’s strong PMI report and today’s Durable Orders report. Mortgage bond prices are up a little which causes a tick down in rates and the 10yr is holding on to slight gains pushing that yield lower as well. The reason why, well consumer sentiment dropped like a rock. I like this report as it shares a real time look into how consumers are feeling. This is not a lagging report which we have to wait a month or two to read as most are. This is what people feel today and they are feeling less confident about the economy. As people feel less confident, their spending habits change.
Retail sales account for 70% of the economy.
I would anticipate a decline in the Retail Sales next month when reported. I don’t see this as a catalyst for rates to drop substantially or for the Fed to cut rates soon, but I do think this is something that filters into other components of the economy and will gain momentum. The bond market closes early today in about an hour and is closed Monday for the Memorial Day holiday. Next week does give us some data with Consumer confidence, GDP, and PCE. The last two will move markets and the PCE is the Inflation report likely to help us the most. That is the Fed’s favorite inflation report.
If you want a little more on Treasury notes and the inverted curve, Bloomberg shared the piece below.
Interesting question.. when the yield curve un-inverts, it is because the short end yield drops (hopefully) or the long end yield goes higher (hopefully not).
It is difficult to time the Treasury curve steepener, which Goldman Sachs Asset Management called the “easiest trade out there in rates” in its year-ahead outlook. Nearly halfway into 2024, it’s still not working. The spread between 2- and 10-year yields sunk to -46 basis points on Tuesday, hovering near the most inverted levels of the year. While traders expected the curve to normalize this year as the Federal Reserve’s rate cutting cycle drew closer, that expectation has been repeatedly pushed out, extinguishing any meaningful steepening impulse.
“The problem with the steepener in this cycle is that the market already prices — and has priced for a while — a full cutting cycle over 2 to 3 years,” Bank of America strategists including Mark Cabana wrote in a note this week.
While it’s not their base case, betting on the 2-, 10-year curve to invert further works as a positive carry, out-of-consensus position given the risk that rates stay on hold for even longer than expected, they wrote. With two-year yields all but anchored in place by current rate cut pricing, that leaves a lot of heavy lifting for the long-end to bring the curve back into positive territory. It’s unlikely that would be the dynamic — a so-called bearish steepener —that un-inverts the curve, according to Ian Lyngen of BMO Capital Markets. “The real steepener will be a bull steepener,” said Lyngen, BMO’s head of US rates strategy. “The only bear steepener will be if inflation doesn’t cool and the Fed is forced to cut soon because of a massive spike in the unemployment rate, but even that wouldn’t necessarily translate into sustainably higher 10- and 30-year yields.”
Stay safe, enjoy the holiday weekend, and first make today great!
