The macroeconomic data continues to come in better than feared, and in some cases actually quite good. The Labor Department reported 1.76 million jobs were added back to the economy in July (vs 1.48 million expected) and the unemployment rate ticked down to 10.2% (versus 10.6% expected) down from last month’s 11.1% reading. 1.1 million initial jobless claims were filed (versus 1.4 million expected) and 16.1 million continuing claims (versus 16.9 million expected). In all, the U.S. economic recovery is outpacing expectations.
Congressional stimulus negotiations broke down on Friday, and in response, President Trump issued a series of Executive Orders extending Unemployment benefits, temporary deferral of payroll taxes for individuals’ earnings less than $100,000/year, and student loan deferrals.
There is a general lack of consensus with respect to reopening of public schools around the country. We are keenly focused on this issue as it will have an impact on parents’ ability to return to work. As Florida’s rate of infections seems be slowing down, it appears infections among U.S. children grew 40% in the second half of July, according to a report by the American Academy of Pediatrics and the Children’s Hospital Association. However, the mortality rate remains extremely low among infected children at 0.03%.
Fixed Income Market:
Light volumes persist in the bond markets as we pass the mid-point of summer. Though activity remains slow, bond spreads have compressed over the past week. Most notably, high yield spreads tightened 45 basis points on the week which closely mirrors the week’s upward move in equities. With this most recent spurt, high yield spreads have now recovered back to the levels of late February. For context, high yield bonds, on average, have now retraced ALL of the 500+ basis point widening that they experienced at the height of the melt down in mid –March. IG spreads were tighter by 5 bps on the week, and similar to the HY market, they are also now back to pre-meltdown levels. One of the drivers behind the spread tightening continues to be the steady inflow of new money into bond funds – according to Lipper, they saw $7.2BN of new money last week.
The new issue markets in both Corporate and Municipal bonds remain busier than a typical summer – this week looks to continue that trend with $35BN of new deals expected in the IG market and close to $9BN in the Muni sector.
All three major indices posted modest gains for the week with DJI up 3.88%, NASDAQ up 2.51% and S&P 500 up 2.49%, with NASDAQ making a new all-time high and S&P closing to just more than 1% of its all-time high. Industrials, Financials and Energy were the leading sectors with Healthcare and Real Estate trailing. Small Cap’s continued to make up lost ground as Russell 2000 was up 6.03% last week. The main issues weighing on the market are still all COVID related: Schools and Colleges in-person or online? Economies recovering and moving forward or shutting down/scaling back and stalling? More stimulus money or a lot more? The market seems to be treading cautiously as these questions remain unanswered.
The summer doldrums are weighing on the lack of direction across the foreign exchange markets. Foreign currencies start the week mired in the same small ranges we experienced all of last week, with no clear direction. Some exceptions have seen small increases on some risk off trades as tensions between US and China continue to make headlines.
Risks in the Search for Yield: Duration
A bond’s duration refers to its sensitivity to changes in interest rates. In general, the greater the bond’s duration, the more its price will fall when interest rates rise (or rise when interest rates fall). The two primary factors that affect a bond’s duration are its time to maturity and its coupon rate.
It’s important to note that a bond’s maturity does not necessarily equal its duration (unless it’s a zero coupon bond). Bonds that have a shorter time to maturity will be less affected by changes in interest rates whereas bonds with a longer time to maturity will be more affected. Therefore, an investor should be properly rewarded for taking on more duration risk.
A bond with a greater coupon rate will have a shorter duration and a bond with a lower coupon rate will have a longer duration. This is because the greater coupon rate helps an investor recapture the original cost faster than a bond with a lower coupon rate.
An investor should consider a bond’s duration when making an investment as a bet on which way interest rates may move and when there may be a use for the money. For example, one would want to invest in long duration bonds if he/she is confident that interest rates will be falling. One would also want to consider matching the duration of the bonds to the duration of a liability.
Last Week's Economic Data August 10th
|Last Week's Economic Data||Actual||Survey|
|Durable Goods Orders||7.6%||7.3%|
|Initial Jobless Claims||1186k||1414k|
|Change in Nonfarm Payrolls||1763k||1500k|
|This Week's Economic Data||Release Date||Survey|
|PPI Final Demand MoM||8/11/20||0.3%|
|Initial Jobless Claims||8/13/20||1100k|
|Retail Sales Advance MoM||8/14/20||2.0%|
This Week's Economic Data August 10th
|Interest Rates||Current||WoW||MoM||YoY||US Swap Spreads||Current||WoW||MoM||YoY|
|1 Month Libor||0.16%||+1.5 bp||(1.1 bp)||(203.0 bp)||12-Month||+11 bp||+0.8 bp||(0.9 bp)||+8.0 bp|
|3 Month Libor||0.25%||+0.5 bp||(1.5 bp)||(192.2 bp)||2-Year||+8 bp||+0.8 bp||+1.5 bp||+15.8 bp|
|6 Month Libor||0.34%||+3.1 bp||(0.9 bp)||(171.5 bp)||3-Year||+8 bp||+0.6 bp||+3.2 bp||+18.8 bp|
|12 Month Libor||0.46%||+0.7 bp||(2.2 bp)||(153.0 bp)||5-Year||+6 bp||+1.0 bp||+4.7 bp||+21.4 bp|
|Fed Funds Effective||0.10%||+1.0 bp||(202.0 bp)||7-Year||+1 bp||+0.7 bp||+5.3 bp||+20.5 bp|
|SOFR||0.09%||(0.0 bp)||(1.0 bp)||(202.0 bp)||10-Year||+1 bp||+10.2 bp||+5.2 bp||+61.1 bp|
|US Treasury Yields||Current||WoW||MoM||YoY||30-Year||(38 bp)||+14.1 bp||+10.2 bp||+70.6 bp|
|12-Month||0.13%||+1.8 bp||(0.8 bp)||(165.7 bp)||Equity Markets||Current||WoW||MoM||YoY|
|2-Year||0.14%||+3.8 bp||(0.8 bp)||(150.2 bp)||Dow Jones||28,116||+1.2%||+7.8%||+7.0%|
|3-Year||0.17%||+5.6 bp||(1.7 bp)||(142.3 bp)||S&P 500||3,360||+0.3%||+5.5%||+15.1%|
|5-Year||0.27%||+8.2 bp||(3.3 bp)||(130.7 bp)||NASDAQ||10,890||(0.7 %)||+2.6%||+36.8%|
|7-Year||0.46%||+10.7 bp||(2.9 bp)||(118.9 bp)||Currencies||Current||WoW||MoM||YoY|
|10-Year||0.63%||+3.8 bp||(0.8 bp)||(150.2 bp)||Euro||1.1764||(0.3 %)||+3.7%||+4.9%|
|30-Year||1.32%||+3.8 bp||(0.8 bp)||(150.2 bp)||Japanese Yen||106.3000||(0.5 %)||+0.9%||(0.9 %)|
|US Swap Rates vs 3ML||Current||WoW||MoM||YoY||British Pound||1.3093||+0.2%||+4.3%||+8.4%|
|12-Month||0.24%||+2.6 bp||(1.7 bp)||(157.7 bp)||Canadian Dollar||1.3303||+0.1%||+2.3%||(0.5 %)|
|2-Year||0.23%||+4.6 bp||+0.7 bp||(134.4 bp)||Australian Dollar||0.7166||+0.1%||+3.3%||+6.1%|
|3-Year||0.24%||+6.2 bp||+1.4 bp||(123.5 bp)||Swiss Franc||0.9148||(0.2 %)||+2.9%||+6.0%|
|5-Year||0.34%||+9.2 bp||+1.4 bp||(109.3 bp)||Israeli Shekel||3.4020||+0.4%||+1.3%||+2.2%|
|7-Year||0.47%||+11.5 bp||+2.4 bp||(98.5 bp)||Bitcoin||11,586||+3.3%||+25.3%||+1.5%|
|10-Year||0.65%||+14.0 bp||+4.4 bp||(89.1 bp)||Commodities||Current||WoW||MoM||YoY|
|30-Year||0.94%||+17.9 bp||+9.4 bp||(79.6 bp)||Gold||1,953||(3.3 %)||+8.6%||+30.4%|
|Copper||286||(1.1 %)||(0.9 %)||+10.5%|
|Crude Oil||43||+2.5%||+5.4%||(21.6 %)|