Bond market in brief
This week, we decided to talk about our bond portfolio. In 2022, the bond market had its worst year in 100 years, the first calendar year to close with a negative five-year annualized return. However, since the beginning of the year, the bond market has recalibrated and yields have posted several gains offering a nice alternative to dividend stocks and allowing for portfolio diversification.
The 2-year and 10-year bond curve, which has been negative for several months now, has just undergone a major reversal. Bond investors are anticipating that we are at the end of interest rate hikes and that the chances of a recession are diminishing. The fractures in the banking system that we have seen in recent weeks are tying Jerome Powell's hands, creating doubts among Fed governors, changing the tone of his latest decision.
Since then, the inversion of the 2-year and 10-year curve has been fading and a return to the norms of the curve would possibly signal the return of better times. The bond market reacted well on Wednesday to the Fed's moderate tone in its decision to raise interest rates by only 25 basis points. Yields on 10-year Treasuries were at 3.44 percent Wednesday, compared with 3.60 percent the day before.
During the market meltdown of 2022, many investors flocked to Treasuries as a safe and secure investment. Indeed, the 10-year Treasury yield started 2022 around 1.5% and jumped to 4% in October. The inversion of the yield curve - an event in which yields on short-dated bonds are higher than those on long-dated issues - has also been beneficial for Treasury yields.
We can see in the following graph the inversion of the curve of 2 years and 10 years.
Stock market in brief
The markets started the week higher thanks to the rebound of the banking sector and the recovery of bond rates. The rise was largely due to the announcement the day before that Credit Suisse would be taken over by its arch-rival UBS, calming investors.
After falling nearly 47% on Monday, First Republican Bank jumped 30% on Tuesday. Janet Yellen's remarks to the American Bankers Association (ABA) calmed the markets on Tuesday.
"The situation is stabilizing and the U.S. banking system remains strong," said Janet Yellen, the U.S. Treasury secretary. "Actions similar" to the loans made quickly to banks after the collapse of Silicon Valley Bank and Signature Bank "may be warranted if smaller institutions experience withdrawal rushes that pose a contagion risk," she said.
On Wednesday, the Fed made the decision to raise its key rate by 25 basis points, now in a range of 4.75% to 5.00%. During his press conference, Fed Chairman Jerome Powell was relatively composed with a more dovish tone than in his last few speeches, even showing more sensitivity to potential pauses. The central bank said that the U.S. banking system remains strong and stable. The recent setbacks surrounding the banking sector could bring about a tightening of credit conditions and that for this reason, the need to raise rates is less pressing.
Jerome Powell even revealed that the committee had thought about taking a break following the uncertainties surrounding the banking sector. However, inflation continues to weigh on the Central Bank's decisions. "The events of the past two weeks should lead to some tightening of credit conditions for households and businesses and thus weigh on demand, the labor market and inflation," he explained.
Also on Wednesday, the bearish movement in the markets did not come as a result of the Fed's decision, but rather by Yellen's latest remarks before a Senate subcommittee that not all U.S. bank deposits would be insured.
On Wednesday, Republican Senator Bill Hagerty asked Yellen, "Madam Secretary, is congressional approval required to ensure that every deposit over $250,000 in every FDIC-insured bank in the country is guaranteed?" Yellen replied that she was not considering such a measure and that she was looking at bank risks on a case-by-case basis, adding, "I have not considered or discussed anything to do with blanket insurance or deposit guarantees," Janet Yellen said.
Indices were up after the announcement of the Fed's decision, but Janet Yellen's comments cast a cloud of uncertainty over the financial markets, sending stocks from the banking sectors tumbling.
"The fact that both Janet Yellen and Jerome Powell spoke at the same time, offering opposing comments, interpreted by investors as contradictory, shook the calm that had settled over the markets following the Fed's decision," says our president and portfolio manager Philippe Pratte.
On Thursday, still under questioning, Janet Yellen finally told U.S. lawmakers that regulators would be willing to take further action to protect the banking system if warranted. Having said the opposite the day before, the markets were pleased with this new statement and closed the session higher. Several stocks benefited from the presence at the convention of the Boss of Tik-Tok while the application is threatened with a ban in the United States: Meta (+2.24%), Snap (+3.08%), Pinterest (+0.51%) while Netflix jumped by 9%, as the banning of the application would be beneficial to the screen time spent by consumers on the digital platform.
In Canada, inflation slowed from 5.9% in January to 5.2% in February. While still not at the Bank of Canada's desired level of 2%, when compared to the world's major economies, our rate remains at a less worrisome level. BMO Chief Economist Doug Porter points out that Canada's inflation rate is lower than most major economies, including the U.S. (6.0%), Australia (7.2%), the Eurozone (8.5%) and the U.K. (10.1%).
Here is the average for the week of the three main indexes at 1 p.m. Friday.
And here's the average for the week for the TSX in Canada.
Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).
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