Municipals reduced to “Neutral.” Near term risk of higher interest rates stemming from European side is too hard to ignore.
From a price action perspective, the drop below the 50-day moving average and the failed higher-high, higher-low pattern are not supportive of an imminent up-turn in interest rates.
We recommend staying cautious and exercising patience in the near term.
The low spread cushion/low yield level combination remains. Issuance tapered a bit while net inflows increased.
This is the first time in the last year or so the 10-year yield has broken through, re-tested, and held above the 50-day moving average.
Inflation and inflation expectations are key inputs to central banks’ policy decision process. Divergent policies have very different impacts on inflation.
We are leaning towards a more favorable outcome for risky assets but staying alert.
Issuance surged in recent weeks as companies rushed to lock in low rates before expected rate hikes.
The ease with which the 10-year yield broke the strong 185 bps barrier was simply too hard to ignore. This tells us interest rates will likely go lower before going higher. The current active range is 140-185.
We rely on past experiences in Japan, the U.K., and the U.S. to give us clues about the future path of the EU QE.