Inside Markets — Rate Sensitive
Rate Sensitive
October 22, 2024
Yesterday’s rapid repricing in bond yields led to the broad selloff in equities, particularly in rate sensitive sectors. Homebuilders were among the worst performing groups, down -3.1% into a heavy earnings week that includes results from PHM, NVR, TMHC, WHR, CCS and MHK. This week also brings Existing Home Sales tomorrow and New Home Sales on Thursday.
Thirty-year bond prices are approaching key technical support that equates to a yield near 4.50%, while the premium-weighted Put/Call ratio sits in oversold territory. Unfortunately, this week lacks the kind of macro data that could materially shift Fed rate expectations so the current range may stay in place for another week or so. We also see the approaching election keeping the yield curve biased toward steepening. Rate sensitive groups like homebuilders will likely reach oversold levels during this period and quickly rebound once yields break trend. In 30-year yield terms that break is at closing levels below 4.41%.
A few months ago, we identified US fiscal concerns as an underappreciated election-related risk. A high and rising US debt-to-GDP ratio would be an easy campaign issue for Republicans to use against incumbent Democrats. That may not be the way it started, but US fiscal concerns seem to be a part of the dialog again like it was last October until a sudden decline in CPI resulted in lower bond yields. The US debt-to-GDP is currently at a record high (included post-WWII) with a handful of notable investors like Stanley Druckenmiller and Paul Tudor Jones citing it as a reason to short Treasury bonds. The term ‘bond vigilantes’ was coined back in the 1970’s when a group of vocal investors shorted Treasury bonds to force the Fed’s hand and hike rates against inflation that ultimately peaked in 1980 at 13.5%. The inflation spike we just lived through was a combination of supply chain issues and unnecessary fiscal spending – a textbook example of too many dollars chasing too few goods. The supply chain issues may be resolved, but the extra dollars that remain in the system are responsible for sticky services inflation. Less is clearly more when it comes to fiscal spending in this environment and we should expect long-end yields to remain relatively elevated until it’s addressed.
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