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Market Commentary | Sept 28, 2021

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Fed's hawkish tone drives yields higher

With the conclusion of the Federal Open Market Committee’s (FOMC) meeting last week, Treasury yields have surged, as taper talk and dot plots indicated a more hawkish tone than the market had anticipated. Yields on the 5-year, 10-year, and 30-year all moved up by 14 to 15 basis points (bps) from the close on September 20th (the day before the Fed began their two-day meeting), through yesterday, September 27th. And rates continue to rise at the time of this writing. Surging commodity prices have likewise helped to push yields higher.

10 Year Treasury Yield

The increase in rates has put pressure on REITs (FTSE NAREIT Equity REIT Index down 4.3%), large cap tech stocks (NASDAQ 100 Index down 2.4%), large caps in general (S&P 500 Index down 1.7%), and of course long-term Treasuries (Bloomberg Treasury 20+ down 1.6%) on a month-to-date basis through the 27th. Also of modest concern for some investors is the debt ceiling showdown. Treasury Secretary Yellen has stated that the Treasury could exhaust its cash by October 18th, and on Monday, Senate Republicans blocked a Democratic bill to fund the government and raise the debt limit.[1] Surely levelheaded thinking, a swell of bipartisan goodwill, and love of country will get us through this impasse (just humor me).

Three quarters into the year, it’s clear that Wall Street has taken full advantage of equity and credit market conditions. As reported by the Wall Street Journal, the IPO (Initial Public Offering) market hasn’t ever been this strong over an entire calendar year, and we still have three months to go.

Breakneck Pace

And buyout related loan issuance hasn’t been this robust since 2007. While loan proceeds are being used primarily to fund M&A activities, in many instances, proceeds have been used to payout dividends to private equity investors.

Buyout Loans

With just a couple of days remaining in the quarter, investors are once again sitting on hefty gains across commodities (Bloomberg Commodity Index +29.2%), REITs (FTSE NAREIT Equity REIT Index +24.6%), small cap stocks (S&P 600 Index +23.4%), and large caps (S&P 500 Index +19.5%) on a year-to-date basis. On the other hand, bond investors are licking their wounds (albeit modest ones), with the Bloomberg US Aggregate Bond Index down about 1.3%. Indeed, it has been a seemingly great time for risk assets.

[1] Wall Street Journal

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A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
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Measures the small-cap segment of the U.S. equity market.
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