In a week with light data the market’s focus has started to turn to the evolving events in Washington DC as legislators start to craft some sort of stimulus measure with time exceedingly short. As is usual, however, Democrats and Republicans remain far apart over what the next stimulus bill will look like. Treasury Secretary Mnuchin and White House officials met yesterday to craft the outlines of a Republican plan and the met with Democratic leaders Pelosi and Schumer to gauge their response. Senate Majority Leader Mitch McConnell said there would be a second round of the Paycheck Protection Program but targeted to businesses most affected by the pandemic. Republicans are also lobbying for another round of direct stimulus checks. But while the Republicans are aiming for roughly $1 trillion in stimulus, Democrats have already passed a $3.5 trillion proposal in the House. So the differences, at least in dollars, are vast while the supplementary unemployment benefits essentially expire this weekend. So, expect a lot of horse-trading for the rest of the month. Finally, we want to mention we’ve published another podcast this week. In this episode, we sat down with Shondell Varcianna, CEO and Founder of Varci Media, to discuss turning prospects into customers with content marketing. In these days of social distancing and limited face-to-face interactions developing an effective marketing message and delivering it to the appropriate audience is more important than ever. Give it a listen, and better yet subscribe so you don’t miss any of our future episodes. The itunes link can be found here and the Spotify link here.
We’ve written a few times of the difference in outlook between equities and fixed income as we’ve worked out of the lockdown holes created in March and April. While equities have rallied to recapture most of the declines in March, Treasuries have remained largely unimpressed and have been happy trading in a range that has persisted for more than three months. The 10-year note, for example, has traded between 0.54% and 0.90%, with much of the time between 0.60% and 0.70%. This morning, I’s at 0.587%.
The disparity between stocks and bonds is also shown in the Copper/Gold Ratio versus the 10yr yield above. Typically, the cooper/gold ratio (white line) and the yield (blue line) have tracked closely. Lately, however, the rally in global commodities, (including copper) has left the 10yr yield in the dust. Treasuries have been more focused on domestic virus case counts and the limits that places on reopening while copper is getting a boost from global economies with better virus stats and awaking economies. If that continues, and especially if our case counts begin to fall, expect yields to move higher, but for now that is tomorrow’s story, not today.
Taxable Municipal Securities Offer an Interesting Alternative
As investors sift through the pandemic-effected investment opportunities, one sector that has emerged as an interesting play is the taxable municipal sector. While not nearly as large as the tax-free sector it can still provide high quality issues with yields that are competitive or better than alternatives like MBS and many tax-free bonds. In addition, because most bank investors hold little of the bonds they do provide additional portfolio diversification. The graph below tracks the A-rated taxable yield curve compared to the curve from the beginning of the year. Prices have rallied, like all other fixed income instruments, but the current yields are still very competitive to other more popular alternatives, especially in the mid to longer part of the curve.
Note the near 2% yield at the 10yr tenor and that is garnering a lot of interest. The slide below is a representative offering from our muni desk of two taxable bonds. Note the 2.00% and 2.10% yield to the 10yr call with a slightly higher yield to maturity, of 13 and 14 years, respectively. These bonds are AA-rated as well offering better credit quality than the A-rated curve above and at better yields. So, please consider the taxable municipal sector if you haven't in the past.
Agency Indications — FNMA / FHLMC Callable Rates
|Maturity (yrs)||2 Year||3 Year||4 Year||5 Year||10 Year||15 Year|