Monday November 14

Equities were mixed to slightly higher on the day while rates continued to selloff. The S&P 500 fell fractionally to 2,164 and the Dow Jones rose 0.1% to 18,868. The KBW Bank index rose 3.2% while utilities underperformed the market. The KBW Bank index is up 13.6% since the election result came in on optimism for that sector. Interest rates around the world continue to rise as investor focus shifts from monetary to fiscal stimulus. As such the 2 year yield today rose 7bp to 0.99%. The 10 year yield rose 9bp to 2.24%. 2yr vs 10yr bear steepened to 1.25%. The two year is up 28bp from it’s election night trough and the ten year is up around 53bp. Interest rates in Europe are rising in lockstep with interest rates in the United States as the 10 year German bund is up to 0.32%. The US dollar strengthened today against peers. USD rose 1.1% against EUR to $1.0745. USD rose 1.6% against JPY to Y108.36. USD rose 0.8% against GBP to $1.2496. The market for Fed funds futures prices in a 92% chance of higher rates in December after somewhat hawkish comments made by Stanley Fischer on Friday. Janet Yellen, Bill Dudley, Eric Rosengren, Stanley Fischer, and Esther George are all set to make comments this week as well which investors will be paying very close attention to. Oil prices were mixed on the day. WTI finished at $43.63 while Brent finished at $44.65. Gold prices continued to ease back finishing at $1,219 and are down nearly 5% since the election.

Financials have performed very strongly in the aftermath of the election. Lower corporate taxes and deregulation would be good for cyclical sectors, which include financials. Dodd-Frank has put a lot of downward pressure on bank earnings, and the possibility of Dodd Frank being reeled in has benefited share prices. Lower household taxes will also lead to an increase in consumption, and an increase in credit and loan growth which is also a positive for banks.

The mortgage market is set to change in a variety of ways in the aftermath of the presidential election. In the current landscape banks stick primarily to conforming, low risk mortgages that they are able to sell to government agencies Fannie Mae and Freddie Mac. As a result higher risk borrowers have not been getting access to credit because banks are unwilling and unable to keep those loans on their balance sheet as a result of higher regulation. Nonbank lenders such as peer to peer lenders have stepped in and filled this void over the last couple of years. Additionally mortgage rates have risen around 25bp since the election result, and are now up to 3.87% on average for a 30 year fixed-rate conforming mortgage. Higher mortgage rates would have a negative affect on home prices. Home prices have been rising over the last few years partially as a result of falling interest rates. Additional financial deregulation could also lead to some changes in the mortgage market since that could enable banks to take on some more risks. Banks have shied away from giving out mortgages that could be perceived as too risky as a result of huge legal risk. With a new attorney general and new regulatory effort banks may reevaluate legal risk.

Municipal issuers have sold nearly $149bn in muni bonds year to date to finance infrastructure projects. Now this coincides with Donald Trump’s election victory, and he has indicated that he will spend money to finance such projects during his presidency. The year to date issuance total is the highest number for each of the last five years. On election day voters also authorized municipal governments to issue another $55.7bn to finance infrastructure projects. That suggests that there is both executive and public support for investing in new infrastructure. Trump has emphasized the importance of rebuilding highways, bridges, tunnels, airports, schools, and hospitals and spend $1tn in doing so. Yields on municipal bonds have risen as a response in line with rising Treasury rates. With yields on the rise, finance managers for municipalities may wish that they accessed markets earlier in the year when rates were at historic lows.

Monday November 14

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