WILL THE SUEZ CANAL BECOME A MARKET NARRATIVE?

Will the selloff in the Treasury market continue?  Investors have historically required a yield bonus (aka risk premium over a specific benchmark) to lock up their money over period of time.  This all changed in the wake of the Federal Reserve’s bond buying following the 2008 financial crisis.

According to the NY Fed, from 1960 this premium has averaged 1.56% but since 2016 the premium was below zero falling as low as a negative 1.15% during the worst of the pandemic.  February the risk premium went positive and Friday it was 0.62%, reaching a high of 0.68% earlier last week according to the NY Fed.

Ten-year yields reached 1.75% last week, the highest since January 2020, partially the result of a bond market proxy marking up annual consumer inflation for the next decade to about 2.33%.

The long and short of it, two primary Treasury market indicators is suggesting higher yields are almost a certainty. The ramifications could be significant given that the 10-year Treasury is the benchmark for the global financial community.

Some are beginning to opine the blocked Suez Canal may further exacerbate inflationary pressures, that the blockage will not be a one-off inflationary event.  As widely noted, the pandemic has completely upended global supply chains and if the blockage continues for much longer, supply channels will become further eviscerated and these pricing pressures may become embedded creating a viscous feedback loop especially in the volatile food and energy component of pricing indices.

The question at hand, will this occur and will the Suez Canal become a diver of market narrative?

What will happen this week?

The economic calendar is comprised of a number of top tier indicators, including the ISM Manufacturing and Non-Manufacturing indices, several sentiment indicators and housing statistics and the three major employment reports including the release of Friday’s BLS report.  Friday the bond market closes early for Good Friday.  Equity markets are shuttered all day.

Last night the foreign markets were up.  London was down 0.01%, Paris up 0.49% and Frankfurt up 0.53%.  China was up 0.50%, Japan up 0.71% and Hang Seng up 0.01%.

The Dow should open moderately lower on the headlines that Credit Suisse and Nomura will take a “significant loss” following the implosion of Archegos Capital Management.  The 10-year is up 8/32 to yield 1.65%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.