Last week on Wednesday, the Fed maintained a dovish stance with nearly all officials forecasting its key interest rate to remain near zero through 2022. The FOMC said it would increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities “at least at the current pace” to sustain smooth market functioning. NY Fed specified that the pace of the increase would be about $80 billion per month for Treasury purchases and $40 billion per month for MBS.
More than 20 U.S. states are seeing a pick-up in the virus cases, and spreading cases in Beijing have also raised concern of a possible second wave of the pandemic. Texas and Florida reported record numbers on new Covid-19 cases on Sunday.
Fixed Income Market:
For the first time in five weeks the credit markets saw spreads widen versus USTs. The bond markets followed the lead of the US equity markets and reversed into “risk off’ mode with Investment Grade spreads widening an average of 10-15 basis points. Not surprisingly, the High Yield market was impacted much harder with spreadswiderby70-80basispoints. Forcontext, a 70 basis point widening would lower the value of a typical 7yr High Yield bond by approximately 4 points.
Despite the widening, we saw a pickup in retail client activity. Structured notes saw strong retail demand as clients took advantage of opportunities resulting from the back up in US equity indexes and continued high volatility. Away from Leumi there was also good retail demand for fixed income. IG bond funds saw inflows of $9.5BLN while municipal bond funds saw $2.2BLN in new money.
The one constant throughout the recent ups and downs has been the record setting pace of new corporate bond deals. Through last week, over $1.1 Trillion in new IG bonds have been issued YTD. At the same point last year, the running total was $560 BLN – that puts us at a run rate 96% higher than 2019 which had the third highest volume on record.
After nearly a 50% rally from March, stocks consolidated those gains by retracing 7% last week. S&P 500 closed on Friday at 3041, remaining above the 200-day moving average of 3015. The Fed has maintained its dovish stance, and announced on Monday its intention to begin purchasing individual bonds. This is intended to lower borrowing costs, which is a tailwind to corporate earnings.
The US dollar continues to be pulled in both directions, and has regained relative strength as the risk trade has eased due to the concerns of a potential second wave of COVID-19. The FOMC left rates unchanged at last week’s policy meeting with a projection of near-zero policy rate at least through 2022.
Data in the US this week should show some improvements from April due to the gradual re- opening of the economy in several states.
Behavioral Biases to Avoid: Loss Aversion
As discussed in last week’s article, the first behavioral bias we will address in more detail is known as loss aversion. Loss aversion refers to the concept of losses feeling more painful than gains feeling good.
The effect this can have on an investor is that one may decide to sell out of an investment that has lost value even though there is potential for the investment to have significant growth in the future. The perceived “safety” of going to cash does not account for the opportunity cost of not capturing the future growth of the investment.
One way to overcome this bias is to work with a financial advisor or professional money manager who can develop an investment strategy that is tailored to one’s goals, time horizon, and risk tolerance. Delegating the responsibility to a professional will help mitigate the risk of emotions clouding one’s investing judgment.
Last Week's Economic Data June 15th
|Last Week's Economic Data||Actual||Survey|
|Wholesale Inventories MoM||0.3%||0.4%|
|FOMC Rate Decision (Upper Bound)||0.25%||0.25%|
|PPI Final Demand MoM||0.4%||0.1%|
|Initial Jobless Claims||1542k||1550k|
|This Week's Economic Data||Release Date||Survey|
|Retail Sales Advance MoM||6/16/20||8.0%|
|Initial Jobless Claims||6/18/20||1290k|
|Existing Home Sales||6/22/20||4.23m|
This Week's Economic Data June 15th
|Interest Rates||Current||WoW||MoM||YoY||US Swap Spreads||Current||WoW||MoM||YoY|
|1 Month Libor||0.19%||+1.7 bp||+2.2 bp||(218.8 bp)||12-Month||+12 bp||(2.6 bp)||(4.1 bp)||+0.8 bp|
|3 Month Libor||0.30%||(1.1 bp)||(8.2 bp)||(210.3 bp)||2-Year||+7 bp||(1.0 bp)||(3.2 bp)||+0.8 bp|
|6 Month Libor||0.43%||(5.3 bp)||(22.8 bp)||(184.7 bp)||3-Year||+5 bp||(0.7 bp)||(1.8 bp)||(0.3 bp)|
|12 Month Libor||0.59%||(3.9 bp)||(16.5 bp)||(165.6 bp)||5-Year||+5 bp||+0.4 bp||+1.0 bp||+3.0 bp|
|Fed Funds Effective||0.08%||+1.0 bp||+3.0 bp||(229.0 bp)||7-Year||(1 bp)||+0.8 bp||+0.1 bp||+1.0 bp|
|SOFR||0.08%||+0.0 bp||+2.0 bp||(229.0 bp)||10-Year||(1 bp)||(14.7 bp)||+0.5 bp||+28.5 bp|
|US Treasury Yields||Current||WoW||MoM||YoY||30-Year||(48 bp)||(18.5 bp)||+3.9 bp||+32.3 bp|
|12-Month||0.18%||+3.6 bp||(183.3 bp)||Equity Markets||Current||WoW||MoM||YoY|
|2-Year||0.19%||(3.9 bp)||+4.2 bp||(165.4 bp)||Dow Jones||25,423||(0.7 %)||+7.3%||(2.6 %)|
|3-Year||0.22%||(6.7 bp)||+3.3 bp||(156.6 bp)||S&P 500||3,018||(0.8 %)||+5.4%||+4.5%|
|5-Year||0.32%||(12.7 bp)||+1.2 bp||(151.3 bp)||NASDAQ||9,604||+0.2%||+6.5%||+23.2%|
|7-Year||0.52%||(16.6 bp)||+3.4 bp||(142.6 bp)||Currencies||Current||WoW||MoM||YoY|
|10-Year||0.68%||(3.9 bp)||+4.2 bp||(165.4 bp)||Euro||1.1281||(0.1 %)||+4.3%||+0.6%|
|30-Year||1.42%||(3.9 bp)||+4.2 bp||(165.4 bp)||Japanese Yen||107.3000||+1.1%||(0.2 %)||+1.2%|
|US Swap Rates vs 3ML||Current||WoW||MoM||YoY||British Pound||1.2554||(1.3 %)||+3.6%||+0.2%|
|12-Month||0.30%||(2.6 bp)||(0.5 bp)||(182.5 bp)||Canadian Dollar||1.3601||(1.6 %)||+3.7%||(1.4 %)|
|2-Year||0.26%||(4.9 bp)||+1.0 bp||(164.5 bp)||Australian Dollar||0.6864||(2.2 %)||+7.0%||+0.2%|
|3-Year||0.27%||(7.4 bp)||+1.6 bp||(156.9 bp)||Swiss Franc||0.9495||+0.9%||+2.3%||+5.2%|
|5-Year||0.37%||(12.4 bp)||+2.2 bp||(148.2 bp)||Israeli Shekel||3.4936||(1.3 %)||+1.3%||+3.3%|
|7-Year||0.51%||(15.7 bp)||+3.5 bp||(141.5 bp)||Bitcoin||9,364||(3.5 %)||+1.3%||+1.0%|
|10-Year||0.67%||(18.6 bp)||+4.7 bp||(136.8 bp)||Commodities||Current||WoW||MoM||YoY|
|30-Year||0.94%||(22.4 bp)||+8.1 bp||(133.0 bp)||Gold||1,722||+1.4%||(1.3 %)||+28.3%|
|Copper||256||(0.1 %)||+9.8%||(2.5 %)|
|Crude Oil||36||(5.2 %)||+23.0%||(31.0 %)|