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Holiday Special Rates on The Market Chronicles Member Area Ends on Dec. 31
S&P 500 Remains Flat in Light Holiday Trading
Today’s market activity was predictable, with the S&P 500 closing flat. Futures volume reflected the holiday mood, with just 840,000 contracts traded. Given that it’s the day after Christmas, this light trading session was expected, and tomorrow may follow a similar trend.
Treasury Yields Show Surprising Strength Amid Strong Auctions
Rates climbed during the morning but eased after a robust seven-year Treasury auction. This week has seen consistently strong auctions, which is noteworthy considering the growing U.S. debt levels. Investors seem attracted to current rates, helping the 10-year yield, which peaked at 4.64%, close lower at 4.59%.
The 30-year yield presents intriguing technical formations, including a potential double bottom (January 2024 and September 2024 lows) and an inverse head-and-shoulders pattern (June, September, and December 2024 levels). A breakout above 4.82% could push the 30-year yield back above 5%, signaling a continued yield curve normalization.
10-2 Yield Curve Holds Steady
The 10-2 yield curve remained relatively flat at 25 basis points, holding steady for several days.
Equity Financing Costs Experience a Significant Drop
Equity financing costs, specifically the S&P 500 BTIC rollover contracts, saw a sharp decline. January contracts, which hit 227 basis points on December 17, have dropped to 84 basis points. February contracts are trading at 90, and March at 85. This suggests reduced demand for leverage, possibly influenced by year-end factors or a broader market trend.
Decline in Repo Activity for Equity Securities
Repo activity in the overnight funding market for equities has also fallen sharply. This decline aligns with reduced equity financing costs, indicating lower demand for margin and leverage. Whether this shift is due to year-end dynamics or a sign of broader risk repricing remains uncertain.
Market Outlook
With fewer anticipated Fed rate cuts next year, markets may be reassessing risk and reducing leverage levels. These developments could shape trading dynamics as we head into the new year. We just have to continue to monitor.
-Mike
Key Terms
Treasury Auction – A process where the U.S. government issues new Treasury securities, setting yields based on investor demand.
10-Year Yield – The interest rate paid on a 10-year U.S. Treasury bond, a key benchmark for economic and market sentiment.
30-Year Yield – The interest rate on a 30-year U.S. Treasury bond, reflecting long-term economic and inflation expectations.
Double Bottom – A chart pattern indicating a potential trend reversal, formed when a security hits a low price twice before rebounding.
Inverse Head-and-Shoulders – A bullish chart pattern signaling a potential upward trend, identified by a central low point flanked by two higher lows.
Yield Curve Normalization – A return to typical spreads between short- and long-term Treasury yields, signaling economic stabilization.
10-2 Yield Curve – The spread between 10-year and 2-year Treasury bond yields, used as a measure of economic conditions and potential recession risk.
Equity Financing Costs – The expenses tied to borrowing funds for equity trading, often quoted in basis points above benchmark interest rates.
BTIC (Basis Trade at Index Close) – Futures contracts designed to align with the closing price of the underlying equity index.
Repo Activity – Short-term borrowing where securities are sold with an agreement to repurchase them, commonly used for liquidity management.
Risk Repricing – Adjustments in market risk assessments, impacting asset valuations, interest rates, or required returns.
Leverage – The use of borrowed capital to amplify potential investment returns, increasing exposure and risk.
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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