Weekly Market Update

Monday, June 12, 2017

A trio of events controlled the market this week. Former FBI Director James Comey’s testimony inferred that President Trump did not obstruct justice, the European Central Bank (ECB) left interest rates unchanged, and the British election resulted in an unanticipated shift in power away from the Conservative Party. Risk-off trades followed generally propping up bonds, but some resistance persists because of absolute rates. Even at values now approaching pre-2016 election levels, cash continues to pour into municipal bond funds ($950 million in inflows this week), in part because of the political events and from the large summer redemption calendar that has been outpacing new-issue volume. Municipals outperformed Treasuries, particularly on the front end, with money staying short and flattening the curve in the face of uncertainty domestically and abroad.

Anticipation of Director Comey’s Senate testimony pushed Treasury and municipal yields lower. Comey’s prepared remarks, released Wednesday, set the stage for his testimony to the Senate Intelligence Committee on Thursday morning. Highlights included his belief that his dismissal was related to the Russia probe, the absence of means to verify the content of his private conversations with the President required detailed note-taking (aspects of which were leaked to the press), and that former Attorney General Loretta Lynch had instructed him to refer to Hillary Clinton’s email issue as a “matter” rather than an “investigation.” Investors seemed somewhat relieved with the lack of definitive White House wrongdoing, allowing a modest market rally before giving back some gains in response to developments overseas.

As expected, the European Central Bank (ECB) left its main interest rate unchanged. Further, the ECB will continue its monthly 60 billion euro bond buying until December. While monetary policy was unchanged, the ECB dropped the phrase “or lower levels” from the decision statement and pledged to keep rates at “present levels for an extended period of time.” The bank revised its inflation target down to 1.5% from 1.7% and indicated that it would cut rates if low inflation risks were to reappear. The British pound tumbled to a seven-week low, but generally the eurozone economy is picking up, with growth expected to rise 1.9%, up from the last forecast of 1.8%.

The U.K. conservative party lost its majority in Parliament. British Prime Minister Theresa May initially called for the snap election while enjoying overwhelming support, expecting to add seats for her Tory Party with her momentum from the Brexit win that swept her into power. However, conservatives lost 12 seats and the Labour Party added 30, resulting in a hung Parliament ahead of Brexit negotiations, casting a cloud over Brexit and forcing May to find a suitable partner to form a government. U.S. Treasury prices drifted after the tally, as the market digested the information seeming to indicate optimism of a softer Brexit strategy.

The U.S. House voted to unwind certain Dodd–Frank regulations. The Republican-led Financial Choice Act would reduce regulations on the financial industry and purportedly encourage economic growth. The measure was approved exclusively along party lines and is not expected to advance in the Senate. More moderate portions of the bill may pass, however, which will mark the first real progress of the Trump administration’s agenda, as healthcare and tax reform overhauls have stalled.

The 10- and 30-year Treasuries closed the week at 2.21% and 2.86%, respectively, up from 2.15% and 2.80% last Friday. The 10- and 30-year AAA MMD closed at 1.87% and 2.71%, respectively, up from 1.86% and 2.69% last Friday. SIFMA reset on Wednesday at 0.74%, down from 0.76% the prior week.

The Bond Buyer 30-day visible supply is at $9 billion, with $7 billion ($5 billion negotiated) expected to come during the week. There is one fed speaker during the week and the FOMC will hold its June meeting. In addition to the rate decision following the meeting, the Fed will release economic projections and Chair Janet Yellen will hold a scheduled press conference. Data for the week include PPI, mortgage applications, CPI, retail sales, import prices, Empire Manufacturing, weekly jobless claims, housing starts, building permits, and the University of Michigan Consumer Sentiment Survey.

Reference Sources: The Bond Buyer, CNBC, Reuters, Bloomberg, The Wall Street Journal, SIFMA, Municipal Market Analytics, and Municipal Market Data.

  6/9/2017 Change*
SIFMA 0.74% -2
LIBOR 1.13% 4
AAA Municipal Market Data Rates 
5-Yr. 1.21% 0
10-Yr. 1.87% 1
20-Yr. 2.57% 2
30-Yr. 2.71% 2
U.S. Treasury Rates
10-Yr. 2.21% 6
30-Yr. 2.86% 6
Municipal to Treasury Yield Ratios 
10-Yr. 84.6% -1.9
30-Yr. 94.8% -1.3
Dow Jones 21,272 66
S&P 2,432 -7

*Change since 6/2/2017
Sources: Bloomberg Information Systems and Thomson Financial

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The information in this material was prepared by non-research personnel of William Blair & Company, L.L.C. The material is not a research report and was not prepared by the research department of the firm. William Blair does not publish fixed income research. The views expressed are those of the Debt Capital Markets Group and may differ from the views of others at William Blair, including William Blair Research or William Blair Investment Management. William Blair's trading desk may deal as principal in or act as a market maker for issuers discussed herein. The accompanying information was obtained from sources which William Blair believes to be reliable but does not guarantee its accuracy or completeness. The material has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. Historical data is not an indication of future results. The opinions expressed are our own unless otherwise stated.

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