APRIL 10, 2017
Risk Off – resulted in an eventful week that left markets basically unchanged – which is surprising.
- A U.S. Naval attack on a Syrian airbase used to launch a chemical attack on its citizens
- A dramatically lower than consensus jobs report that included downward revisions
- FOMC minutes from the March meeting that addressed plans to normalize its portfolio
- Concern from European investors that the ECB may continue to scale back its purchases as part of its Quantitative Easing program
- The resignation of Richmond Fed President Jeffrey Lacker for leaking confidential information to a policy intelligence firm
Safe-haven Treasury securities rallied Friday morning in response to the airstrike, but quickly settled back and closed lower on the day. Rates seem range bound as market forces, Fed policy, and legislative gridlock compete for headlines. During this reversal, the Non-Farm Payroll report came in 100,000 below consensus, at +98,000 with 38,000 jobs reduced from the previous two-months’ reports. Offsetting this weak number was an Unemployment Rate showing a reduction to 4.5%.
With the additional rate hikes the Fed has projected for this year, there is speculation over how it will normalize its $4.2 trillion balance sheet. Minutes from the recent meeting disclosed “rollover tapering would likely be appropriate later in the year.” It is expected the process would consist of no longer reinvesting proceeds from interest income and maturing Treasury and MBS debt, allowing the bank to achieve a portfolio of approximately $2.8 trillion by 2021. The European Central Bank has already reduced its QE policy from €80 billion to €60 billion and amid Brexit negotiations and national elections, the WSJ reports that investors are concerned that Europe’s biggest buyer may further reduce its support.
Details of a previous investigation regarding the possible leak by Dr. Lacker were omitted from an original report that has been prepared before the FRB of Richmond, reappointed him in 2015. The leak took place in 2012 and contained “potentially market moving information.”
Other than these items, the market also saw the 504 program’s April debenture sale price on Thursday, for settlement on Wednesday, April 12. Priced at 2.84%, and a spread of +49 bps to the ten-year Treasury, 2017-20D was 20 bps lower than the March sale and just 3 bps higher than the December 2016 debenture which priced prior to two Fed rate hikes. In the chart below, it is clear how the market anticipated the recent interest rate increases but what is most impressive is that small business borrowers now are locking in 20-year fixed-rate 504 loans just 63 bps above the Prime Rate.