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Market Update

10-year Treasury dips to monthly low despite strong macro fundamentals

April 19, 2021
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    Kevin Jones

    Treasury Advisory

    Corporates | Kennett Square, PA


This week, further downward moves in long-term rates belied strong macroeconomic data prints in retail sales and unemployment. The roughly 8bp drop in the 10-year yield illuminates a challenge for corporate borrowers exposed to idiosyncratic market movements.

Following four consecutive months of upward momentum, long-term rates represented by the 10-year treasury yield fell over the past week, down approximately 15 basis points since the beginning of the month. The move comes amid strong data prints in unemployment and retail sales, and is likely explained by the Johnson & Johnson vaccine pause, along with hedge fund repositioning. The move down is further contradicted by equities hitting record highs and oil surging upward as well, rendering a challenging landscape for borrowers and hedgers alike.

Treasuries fall despite auspicious economic data

A week that saw equity markets hit record highs, combined with reduced unemployment and strong retail sales, would typically trigger concurrent increases in long-term rates, consistent with economic growth expectations. Curiously, the reverse happened over the past week. Initial jobless claims came in at 576,000 Americans filing for first-time unemployment, the lowest weekly figure since the onset of the pandemic and beating economist expectations by over 100,000. Retail sales data released for March revealed a 9.8% month-over-month increase, the strongest such figure since May 2020, when Congress passed the first round of stimulus. Indeed, stimulus checks likely played a similar role this time around; as shown in the chart below, stimulus checks boosted the January figure as well, which absent the stimulus months has not been a stellar data series.

Rather than being buoyed by the positive economic signals, long-term dollar rates fell during the week, with the 10-year reaching a 30-day low of 1.576% on April 15. The initial move downward was likely a response to the pause in distribution of the Johnson & Johnson vaccine, thus weighing on short-term growth prospects. However, the series moved further south at the same time as the strong retail sales and unemployment data releases; this unlikely move was ostensibly related to hedge funds reversing short positions they had entered into at the beginning of the year. The roughly 10 basis point intraday decline in the 10-year highlights a rate risk challenge for borrowers tracking macroeconomic fundamentals; such idiosyncratic factors could just as easily move rates in the opposite direction, illuminating the import of principles-based hedging strategies in this market.

(Related insight: Read "Managing interest rate risk on future debt issuances.")

Fed Chair Powell reiterates patient stance

Markets continue to be on alert for potential inflation and a timeline for eventual Fed rate hikes. On the inflation front, CPI data released last week showed an attention-grabbing 2.6% year-over-year figure, but it was discounted by markets looking past the transitory energy-related impact on CPI. Rather, core CPI—which strips out energy and food prices—remained subdued at 1.6%. The Fed, meanwhile, reiterated its guidance-driven approach on rate hikes. Regarding potential asset tapering, Chair Powell noted the Fed would likely taper long-term asset purchases before raising short-term interest rates. Currently, the Fed purchases long-term securities in order to put downward pressure on longer-term rates to support borrowing.

Oil prices move upward on OPEC announcement

After falling in mid-March, crude oil jumped last week after OPEC raised its 2021 oil demand growth forecast, projecting that demand will rise by 5.95 million barrels per day in 2021. That projection represents an increase of 70,000 barrels per day from last month's forecast, driving crude up $2/barrel to roughly $66.50/barrel. An upward revision in OPEC's forecast reverses the trend of the past few months, which came in the face of increasing COVID-19 cases, especially in Europe. Signaling further demand increases, U.S. crude inventories fell by 5.8 million barrels last week, the largest decline in two months.

(Related insight: Read "Using commodity collars to manage market volatility.")

About the author

  • Kevin Jones

    Treasury Advisory

    Corporates | Kennett Square, PA

    Kevin Jones serves Chatham’s corporate clients in interest rate and foreign currency hedging advisory. Kevin’s expertise spans risk quantification and analysis, hedging strategy development, market dynamics, and trade execution.


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