Bond Market Moves: Entirely “Precedented”
Market Update: Precedented. The S&P 500 rose 4.6% to new highs in its largest weekly advance since November amid positive earnings results, easing Covid constraints, falling virus caseloads, improved economic data and the potential for much more fiscal stimulus.
Long-term interest rates continue to rise. The 10-year rate rose last week helping to broaden the stock advance and its up another 3 bps overnight to 1.19%. It has risen almost 30 bps since the start of the year, approaching the highest levels in the pandemic. We will cover interest rates and inflation on this week’s podcast. The three charts that truly matter to overall interest rates, inflation, real growth and stocks have been attached and will be covered at length in this week’s Friday podcast. This is precedented .
Precedented: history repeating itself
Readers please note, the annotations on the three charts were drawn in October of last year, 2020, pre-election. Readers should see that these subsequent moves in the bond markets are almost 100% spot on “normal” for this cycle. Again, they are precedented. They are not “unprecedented,” as alleged by the media. Thank you, Federal Reserve and its QE programs.
High-yield US. corporate credit spreads have tightened 37 basis points this year. Oil prices are up another 1% to one-year highs of $57.5 a barrel.
Latest stimulus bill, unprecedented
Joe Biden’s $1.9 trillion package becoming law took a step forward on Friday when the Senate and House passed budget resolutions to advance the reconciliation process. This will allow the Democrat majority in the Senate to pass the legislation with a simple majority in the Senate, likely requiring Kamala Harris’ vote, rather than 60 votes which would require the cooperation and agreement of Republican lawmakers.
Members of Congress will now spend several weeks writing a relief bill that is based on large portions of Biden’s plan, which includes $1,400 relief payments to most individuals, a $400 weekly supplemental payment to the unemployed through September, and $350 billion in municipal government aid. Both chambers will then need to pass a final bill into law, though it could face resistance from one or two Senate Democrats. It is just a matter of time before an extra jolt of borrowed money hits the economy. This extra fuel will likely kick in just as the economy is turning around: easing restrictions, pent-up demand, and hefty household savings.
Resources
Interesting reading:
- U.S. and China talk tough on Myanmar and Taiwan in tense first call since Biden took office
- Handicapping the market’s upside from here as stocks run up the score on bonds
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