Weekly Market Update

Monday, March 20, 2017

The FOMC raised the target range of the federal funds rate by 25 basis points. After only two rate hikes in two years, the Fed has now executed two more increases in only three months. Strong data, headlined by solid February nonfarm payroll data, coupled with Chair Janet Yellen’s remarks prior to the March pre-meeting blackout all but assured that a rate hike would occur. Chair Yellen broke from tradition with a surprisingly strong pre-meeting message, causing the CME FedWatch to jump from 40% to nearly 100% expectation of March rate hike. The Fed will continue to monitor labor markets and “realized and expected economic conditions” as it determines the pace and timing of future rate hikes. Labor markets and CPI remain below their optimal levels. Open market operations will continue bond purchases with income from the holdings of earlier “QE3” stimulus purchases, as slowing of reinvestment or selling would compete with the Treasury auction calendar and thereby apply upward pressure (essentially a stealth rate hike) to the long end of the yield curve.

Foreign central banks echo the tightening sentiment of the Fed. Central banks delivered a range of policy actions over the last two weeks, and each acknowledged various levels of emerging strength in their respective economies. The European Central Bank (ECB) left its rates unchanged. The Peoples Bank of China (PBOC) raised rates by 10 basis points (affecting medium-term loans and reverse repurchase agreements), and restated its concerns about its debt-fueled economic expansion, including the long-term consequences of its riskier loans. As expected, the Bank of Japan (BOJ) left its rates unchanged. BOJ Governor Haruhiko Kuroda indicated that “Japan's economy is recovering moderately. Price growth remains around zero but is likely to accelerate toward 2 percent, albeit gradually. I don't think we need to think about [deepening negative rates] now.” The Bank of England also left rates unchanged (however, not by unanimous vote for the first time since July 2016) and will remain committed to the current pace of government and corporate bond purchases.

The battle of the budget begins. The Trump White House released its first look at the budget on Thursday. There will be significant winners and losers given the deep cuts, and early indications are that the Trump budget will be a nonstarter. Winners include the Defense Department, Homeland Security Department, and Trump’s infrastructure plan. Losers include the EPA, State Department, Health and Human Services (HHS) Department, and the Corporation for Public Broadcasting. According to the New York Times, the Defense and Homeland Security Departments will see their budgets increased by 10% and 7%, respectively, while the EPA, State Department, and HHS Department will see their budgets slashed by 31%, 29%, and 16%, respectively. Funds to support the president’s own infrastructure plans will come from cuts across the infrastructure budgets of a variety of federal agencies. Curiously, despite cuts to their budgets, these agencies will still need to be involved in the execution of any proposed infrastructure plan.

Markets rallied following the FOMC rate hike announcement. In the weeks prior to the FOMC meeting, with a March rate hike increasingly all but certain, long Treasury yields and MMD both moved higher by approximately 20 basis points. Ending the rate hike uncertainty (albeit doubt was at a minimum) with dovish bias in the Fed’s post-meeting press conference drove a 6- to 9-basis-point relief rally in the Treasury market and 4-basis-point rally in tax-exempt yields. The $6.1 billion calendar was well received considering the stakes of Fed week. Secondary trading spiked following the Fed decision, with trading on Wednesday afternoon alone surpassing the total volume of the week in progress. The coming week is light on data and heavy on Fed Speak (both hawks and doves). The difference of opinions will likely leave the market range-bound, and the latest Bloomberg Survey indicates that the Treasury 10-year will remain well inside 2.65% as the June FOMC meeting approaches.

The 10- and 30-year Treasuries closed the week at 2.50% and 3.11%, respectively, down from a respective 2.58% and 3.16% last Friday. The 10- and 30-year AAA MMD closed at 2.40% and 3.18%, respectively, down from a respective 2.47% and 3.24% last Friday. SIFMA reset on Wednesday at 0.71%, up from 0.62% the prior week.

The Bond Buyer 30-day visible supply is at $4.7 billion, with $3.1 billion ($1.6 billion negotiated) expected to come during the week. Data releases for the week include weekly jobless claims, durable goods orders, capital goods orders, and PMI.

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

  03/17/2017 Change*
SIFMA 0.71% 9
LIBOR 0.98% 9
AAA Municipal Market Data Rates 
5-Yr. 1.67% 2
10-Yr. 2.40% -7
20-Yr. 3.07% -7
30-Yr. 3.18% -6
U.S. Treasury Rates
10-Yr. 2.50% -8
30-Yr. 3.11% -5
Municipal to Treasury Yield Ratios 
10-Yr. 96.0% 0.3
30-Yr. 102.3% -0.3
Dow Jones 20,915 12
S&P 2,378 6

*Change since 3/10/2017
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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