Market Recap 11/3/2023

11 3 table


Bonds are boring they say.   Like watching paint dry.  If you want excitement buy a tech stock.  If you want slow and steady, but a Treasury.  Oh, how wrong they are!!!    The price on the 10-year Treasury bond has been whipping around like a money losing start-up….which in a way a government bond is (money losing, not a start-up).  Long-term government bond prices rallied over 5% in one week.   One week!!  The yield on the 10-year has fallen roughly half-a-point in a couple weeks.  You don’t see moves like this very often.

Of course, there’s the story as to why yields declined (and stocks rallied), and then there is the story behind the story.  Let’s start with the straightforward bit.  The Fed met this week and decided they had done enough for now, and today’s employment report only solidified this view.


A graph with blue linesDescription automatically generated


There are a few reasons they are taking the ‘discretion is the better part of valor’ path.  First, long-term interest rates have gone up a lot.  You can see below that the yield on the 10-year flirted briefly with 5% only a few days ago.  


A graph of a stock marketDescription automatically generated


This move is doing some of the Fed’s job for them as numerous financing costs are tied to long bonds.  Car loans, mortgages, the loan on that apartment building down the street, even the cost to finance a start-up business.    

Secondly, inflation is sort of moving in the right direction.  The headline CPI is down a bit, but strip out housing and inflation is at the Fed’s target.   


A graph with blue line and white text

Description automatically generated


Granted, the growth data in the third quarter was robust, but the early guess for the fourth quarter is much less exciting, as you can see below.


A graph of a number of peopleDescription automatically generated with medium confidence


And the employment picture is starting to soften just a bit.  A relatively modest 150,000 jobs were added last month, and prior reports were revised lower.   Additionally, the unemployment rate ticked higher again to 3.9%.  It is now a half-a-percentage-point above its cycle-low from earlier in the year.




A more accommodating Fed puts people in a buying mood, at least that’s what the playbook says.   


The Story Behind the Story


Of course, no one can ever be sure why the markets do what they do, but we’d contend there’s another factor at play.  Let’s step back for a minute.  Harken back to early August – lazy summer days, vacations, and the realization that this year’s F1 season is a snooze fest.  But August 2nd is also when worries about funding the U.S. government flared up in a big way.  Headlines blared that deficits are out of control and there’s a tsunami of new bond issuance coming down the pike.  

And the headlines weren’t wrong.  On August 2nd the Treasury announced their funding requirements for the third quarter of 2023.  It was a big number – right around $1 trillion.  Bond yields spiked higher. 



A graph with blue line and white text

Description automatically generated


This isn’t a new story of course.  For example, the total amount of U.S. Treasuries held by the public rose to a record $25.7 trillion in September.  This series is up $9 trillion since January 2020, and has quintupled since the financial crisis.  But the rate of change seemed to be accelerating.  


A graph showing a line going upDescription automatically generated


But this week the worry started to abate for a couple reasons:  


  1. First, the US Treasury announced its borrowing estimates for Q4-2023 ($776 billion) & Q1-2024 ($816 billion).  These are big numbers, but less than analysts were expecting.  


  1. Then on Wednesday the Treasury said how their borrowings in Q1 were to be financed.  58% of funding needs would be through short-term Treasury bills, not long-term bonds.  This is a huge shift from the typical mix of 15% to 20% short-term funding.  This news kicked off the big rally in bond prices (fall in yields), as you can see below.


A graph on a black background

Description automatically generated


Why?  Fewer long-term bonds issued means less supply and less pressure on yields.  The market was priced for a tsunami that isn’t going to materialize, at least not in the first quarter next year.  

Of course, there’s a good news/bad side to this change:  

  • The bad news is that the Treasury is going short because they are worried there isn’t enough demand at the long end.  Investors don’t want the long-term risk of being debased by inflation.  

  • The good news (for now) is that issuing short-term bonds to fund deficit spending is like tapping the overdraft line of credit to pay for a vacation.  It’s stimulative for the economy in the short-run and doesn’t have the effect of driving up long-term interest rates and slowing growth.  No crowding out so to speak.

For now, the markets like the tradeoff.  But the risk for next year will be a resurgence in inflation.  Bonds are going to be far from boring in the months to come.


(Other) Charts We Found Interesting

  1. Another inflation chart – on the path towards 2% or the lull before a resurgence?




  1. This is one way of showing the so-called equity risk premium – short-term bond yields exceed the earnings yield on the S&P 500 for the first time in decades.


A graph of blue and white lines

Description automatically generated


  1. The outlook for fiscal policy will be a big factor at play in 2024.    


A graph of a graph showing the number of the same numbers

Description automatically generated with medium confidence


  1. At one point WeWork had a valuation of $47bn.  It will probably go bankrupt this month.  




  1. There’s always a bull market somewhere – orange juice edition.  




  1. Brings back memories of Trading Places and Randolph and Mortimer Duke – ‘looking good Billy Ray – Feeling good Louis!!’  




Have a good weekend

Charles Blankley
Chief Investment Officer
Gemmer Asset Management LLC

Published by Gemmer Asset Management LLC. The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

Related Articles

Market Recap 8/26/22

Market Recap 8/12/22

Market Recap 8/5/22