Treasuries Rally on Biden Stimulus Proposal
President-elect Joe Biden unveiled a stimulus package last night that could exceed $1.9 trillion. The first part of the package is characterized as rescue items intended to provide lifelines for struggling families and help for minority communities. Headlining the package are $1,400 stimulus checks, an expansion of the child tax care credit, extended unemployment benefits, state and local funding and funds for vaccine acquisition, distribution and testing, and raising the minimum wage to $15/hour. A second group of programs to be unveiled later in the year will include more investment-oriented projects intended to boost employment with healthcare and infrastructure projects topping the list. Treasury yields are lower off the news as the big price tag and a few contentious items (state funding and minimum wage) will make it harder to pass in a timely manner. Finally, we kick off the 2021 podcast season with a look at investment portfolio management with CenterState’s own Todd Patrick. We discuss the rate outlook for this year, then dive into some thoughts on investing the coming liquidity from the new fiscal stimulus package, and specifically look at the MBS and Muni sectors for opportunities and challenges in those key portfolio areas. The iTunes link can be found here and the Spotify link here.
There’s been some chatter this week from Fed officials about the possibility of beginning the discussion of tapering QE purchases later this year. The most notable in the camp to begin discussions was Atlanta Fed President Rafael Bostic who said that if the economy was performing well into the second half of the year that tapering discussions would be appropriate. That sent a bit of a shiver through Treasuries early in the week as investors had been told in previous Fed guidance that the current pace of purchases would continue until the economy had made “substantial progress.” However, later in the week both Vice Chair Richard Clarida and Fed Chair Jay Powell reiterated that there’s very little chance that tapering discussions will occur this year and that contributed to a renewed bid in Treasuries. It’s a lesson once again that not all Fed Speak is equal.
So, not only will the $80 billion/month in Treasury purchases and $40 billion/month in MBS purchases continue for the balance of this year, if you spy the distribution of maturities in the Fed’s portfolio above, extending the maturity of purchases into the 10– to 20-year range is very possible if the Fed feels long-term rates have moved too far too fast.
Copper/Gold Ratio Points to Higher Treasury Yields
We mentioned earlier that the Fed could easily extend its Treasury QE purchases further out the maturity curve if it felt yields were moving too high too fast and imperiling the economic recovery. One chart that suggests they just may have to do that at some point this year is the Copper/Gold Ratio. The idea behind the ratio is that as copper prices rise it reflects strengthening economies as copper is used in a host of applications. Meanwhile, gold tends to rise in periods of uncertainty and as a store of wealth in troubled times. Thus, a rising ratio indicates a strengthening economy which tends to force yields higher. As the chart below shows the ratio does a pretty good job in leading Treasury yields.
As the graph shows, however, the latest move higher in the ratio hasn’t been fully joined by Treasury yields suggesting one of the two will have to correct. Either the copper/gold ratio needs to fall or Treasury yields need to move higher. Consensus expectations point to 2021 as a year of recovering economies, and while one could say copper prices have rallied in anticipation of better economic growth to come, it still looks like longer-term Treasury yields will continue to have an upward bias for some time. The question then is at what point does the Fed step in and extend the duration/maturity of Treasury purchases to stem the rate increase? W think it will come when the more interest rate sensitive sectors, like housing and autos, start to signal softening activity. Also, the Fed will likely have help in mitigating a long-end rate increase as foreign investors will no doubt get more interested as Treasury yields rise. There’s currently $17 trillion in negative yielding sovereign debt across the globe, close to the $18.25 trillion high from last December. As yield spreads on Treasuries widen against sovereign debt, investors will step up their purchases and aid the Fed in keeping long-term yields in check.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.08%||Unch||1 Mo LIBOR||0.13%||Unch||FF Target Rate||0.00%-0.25%||3 Year||0.278%|
|6 Month||0.09%||Unch||3 Mo LIBOR||0.25%||+0.01%||Prime Rate||3.25%||5 Year||0.539%|
|2 Year||0.14%||Unch||6 Mo LIBOR||0.25%||Unch||IOER||0.10%||10 Year||1.11%|
|10 Year||1.10%||-0.02%||12 Mo LIBOR||0.33%||Unch||SOFR||0.08%|
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