As fiscal, monetary, and economic growth forces drive fixed income activity, Trader TV speaks to Sweta Singh at City Different Investments about how trading desks are navigating the current market uncertainty and mixed data signals. Singh discusses the Fed’s interest rate trajectory, tariffs data, and the record-high municipal bond issuance for June and July. Amid these conditions, she shares where she sees value in the US treasury curve and looks at tactical opportunities for traders to capitalize on this summer.
Interview
Jo Gallagher – What are the biggest macroeconomic forces shaping fixed income activity and credit spreads over the next few weeks?
Sweta Singh – On the fiscal front, August 1st was a big trade deadline. However, we are still seeing trade deals that need to be negotiated with important trading partners like China, Canada, and Mexico. But of note on the fiscal front is that we are seeing tariff revenues creep in. For the month of July, this was around 25 billion, and for the second half of the year, this number should go higher. Moving on to monetary policy, in the last week of July the Federal Reserve met and what we’re seeing in the Federal Reserve are two camps emerging. One that is fearful of tariff-induced inflation, and then the second camp that is worried about a weakening in the labor market. In the second cap, we see Governors Waller and Bowman, who were advocating for a 25-basis-point rate cut. However, the wait-and-see camp prevailed and they left rates untouched. Two days after the Fed met, the labor market numbers were revised. Dramatically to the downward side. So now the labor market weakness has sort of foreshadowed the inflation piece in the economy. The Fed’s favorite inflation measure, core PCE (personal consumption expenditure), is still higher than its 2% mandate at 2.8%. The third leg of the economy is really growth. Q2 numbers for this year came out at 3%. This is a big swing from Q1, which came out at 0.5%. Now, the US consumer has stalled in spending, and that is because of the nervousness and the uncertainty surrounding the fiscal picture.
Jo Gallagher – How do you position your portfolios in conditions that are sensitive to market swings and variable data signals?
Sweta Singh – At City Different Investments, we are total return managers, that is to say, we take risk only when we are getting paid to take this risk. And we accomplish this by tracking a bunch of different metrics, slope of the curve, credit spreads, real rates, curve allocations, so on and so forth. I’ll give you an example to illustrate how we think through this. As of last Friday, the Five-Year Treasury is yielding 89% of income of a 10-year treasury bond. So you’re only taking 50% of duration risk and getting close to 89-90% income. And this measure historically has been around 77%. And it’s a 0.66 standard deviation event. What all this says is really one to five-year part of the curve is where we are seeing value, and that’s where we’re overweight. Now, let’s jump down to volatility and how the second half of the year is positioning right now. In the Fed’s futures market, for September, we are seeing somewhere between a 90% probability for a 25 bps (basis points) rate cut. This comes down in October to a 66% probability for a 25bps rate cut, and for December, around 80% probability of a 25 bps rate cut. Now, how would I crystallize it into our portfolio? We are staying midpoint neutral in terms of duration, so we can be nimble if there’s a curve steepening. Or just to take advantage of changes in different metrics for the second half of the year.
Jo Gallagher – Munis (municipal bonds) issuance tends to be slow during the summer. Why is this summer different? And where can trading desks capitalize on opportunities?
Sweta Singh – So this summer has been like no other for munis. For the months of June and July, we saw 50 billion plus in terms of issuance. For year to date, we’ve seen 300 billion plus. This is 20% higher than last year. But here’s the staggering number. If you look at five-year trailing issuance average, this is 55% higher. So big muni issuances for the first half of the year. What I actually don’t know is how would this play out for the second half of year in terms of issuance. Was issuance front-loaded? But our take here is that what is unique about the muni market is the 2-10th slope. As of last Friday, that’s somewhere around 83 basis points, much steeper than the Treasury 2-10 slope, which is around 53 basis points. If that persists, this is a trend that we can take advantage of in the next couple of months.
Jo Gallagher –Thank you, Sweta, for your insight, and of course, you for watching. This has been Trader TV This Week.
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