Fed Chair Powell and Treasury Secretary Yellen came before the House Financial Services Committee yesterday afternoon as part of their required quarterly update to Congress on the CARES Act. The questions as you could guess quickly moved along partisan lines with the Republicans more interested in hearing the duos thoughts about Biden’s latest $3 trillion spending plan. Yellen, as a member of the Biden Cabinet, pushed for it given the “need” and “low rates.” Powell, meanwhile, has long since refrained from offering advice to Congress on fiscal matters and he stuck to that script yesterday, mostly reiterating the good that has come from existing monetary and fiscal policies and to not pull back too quickly. That’s a refrain we Fed watchers have heard a lot lately.  Finally, in our latest podcast we sit down with Greg Rains SVP of Fixed Income Sales at SouthState and Chad McKeithen, Managing Director of Strategy for Duncan Williams. We discuss the steep yield curve and how to play it, along with what we learned from the recent FOMC meeting and how to play that. The iTunes link can be found here and the Spotify link here.

Economic News

Much of the recent run-up in yields has been the thought that inflation would get a foothold fueled by a rebounding economy, easy monetary policies, and round upon round of fiscal stimulus. TIPS breakeven inflation rates rose to multi-year highs on that expectation and nominal yields largely followed along. Well, one part of that inflation story could be pausing if not rolling over. The graph below is the Thompson Reuters Core Commodity Index. It tracks 20 commodity futures prices and as you can see the long run higher coming out of the March sell-off last year appears to be pausing, if not starting to roll over indicating some softening in commodity prices.

A big part of the weakening has been led by  a retreat in oil. As Europe stumbles over yet another COVID wave and renewed lockdowns the global rebound thesis has taken something of hit and that has contributed to some of the softness. Another reason is that most commodities are priced in dollars and the nearly year-long weakness in the greenback has paused with something of a  rounded bottom being put in (blue line). A stronger dollar makes commodities cheaper which accounts for another piece of the price action. If commodity prices continue to weaken, or just stop rising, the inflation story and hence Treasury yields may pause for a bit.


Total US Debt Approaches $28 Trillion With More To Follow

We just talked about the recent softening in commodity prices and if that continues how it will put a dent in the inflation story as one driving force behind higher yields. Another obvious force is the supply of debt and that is not going to subside anytime soon. As the graph below shows, total US debt is approaching $28 trillion and will continue higher. The latest surge in debt brought on by the three COVID-related stimulus bills and an economy emerging from a virus-induced recession has pushed the debt as a percent of GDP to levels not seen since WWII.  In that situation the US grew it’s way out of the debt problem. Being one of the only developed countries not damaged by the ravages of the war, the US went through an unparalleled period of growth as something of a supplier to the world. We are not likely to have that luxury this time as we compete with many developed and functioning major economies.

And so it is that Treasury Secretary Janet Yellen found herself in front of the House Financial Services Committee yesterday answering questions as to how the US can be expected to pay for a $3 trillion spending program outlined in broad form by the Biden Administration this week. She opined that now is the time given the need for infrastructure programs and other broad initiatives. And with rates low there is not a better time to borrow than now. While the three COVID-related stimulus packages were passed with relative speed, a broad spending program as outlined by Biden will be another story. It will probably entail months of horse trading even amongst Democrats if they choose to move the programs through the reconciliation process. Thus, expect more discussion and haggling as each will want their piece of the bacon before it becomes law. So the thought of another $3 trillion in debt put upon the pile we’ve already amassed appears daunting, but for now the market isn’t giving it much attention. At some point they will and yet another pressure point will be applied that biases long-term rates higher.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.11 0.32 0.65 1.05 2.10 2.56
0.50 0.10 0.29 0.59 0.93 1.96 2.45
1.00 0.09 0.26 0.56 0.89 1.87 2.32
2.00 0.24 0.50 0.81 1.75 NA
3.00 0.75 1.69 NA
4.00 1.64 NA
5.00 1.61 NA
10.00 NA

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Published: 03/24/21 Author: Thomas R. Fitzgerald