From PNC’s Trader Desk

In this quarterly series, the Capital Markets team at PNC provides analysis of trends, news, and activity in the market from the previous quarter and looks ahead to what may be on the horizon.

Foreign Exchange^[1]

The first quarter of 2024 has been one of narrow ranges, decreased volatility, and lower corporate volumes as a result, and it all comes down to one word: pivot. Historically, central banks have raised rates slowly and methodically in a pattern almost resembling an escalator. By contrast, rate cuts have followed a pattern more like an elevator, as central banks look to respond to economic weakness quickly. In the first quarter of 2024, the market priced in far too many rate cuts, and the pivot towards cuts has proceeded more slowly than hoped. As the market scrutinizes data points and commentary for clues as to when cuts will be coming, the result has been range trading with little impetus to break out. Looking forward, PNC expects the currency markets to continue to be heavily influenced by interest rate differentials.

Derivatives^[2]

For derivatives, the primary theme of the first quarter of 2024 was the “Great Convergence.” Following the Federal Open Market Committee (FOMC) statement in March, rate markets and the FOMC agreed on three projected cuts to federal funds rate in 2024. With the Fed reaffirming the likelihood of three cuts in 2024, markets quickly repriced and converged close to the Fed’s projections. This convergence between the market and the Fed also triggered swap rates to close out the first quarter near three-month highs. For the quarter, 2Y Swap rates were up (47Bps), 5Y Swap rates up (45bps), and 10Y Swap rates were up (36bps). For all the movement in in underlying rates, volatility was relatively subdued. Shorter expiry at-the-money swaptions saw volatility decline, but most other areas of the volatility grid were fairly flat on the quarter.

For the trading desk, the majority of inquiries centered around three specific needs:

Corporate issuers using forward starting swaps to hedge against unfavorable rate moves against future issuance.
Floating rate borrowers swapping to fixed to take advantage of the market over-pricing in potential rate cuts.
Buy-side firms (asset managers and insurance companies) paying fixed in swaps as they hedged the heavy amount of corporate issuance from the first quarter of 2024.

Tax-Exempt Fixed Income

The largest headwind in the tax-exempt space for most of the first quarter was the “richness” of municipals. Typically, municipals are compared against taxable products when determining if they are attractive or not, while taking into consideration the tax-exempt status. As an example, tax-exempt AAA paper in the 10-year range usually trades around 75% of the corresponding treasury. When that ratio becomes 85%, 90%, or even 100%, tax-exempt paper is considered to be “cheap.”

For most of the last three months, the opposite has occurred. Tax-exempt paper is currently trading at close to 60% of the corresponding treasury, which makes the asset class rich. This has only occurred a few times previously, and usually the market adjusts quickly. However, this has not been the case so far this year, and there continue to be rich ratios due to separately managed accounts (SMA) continuing to put money to work, as well as limited supply. The big question looking forward is, how long will the low supply and higher demand continue during what is usually a more difficult cash flow environment around tax time?

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Important Legal Disclosures and Information

1. Foreign Exchange is a PNC Bank product.

2. Derivatives are sold through PNC Bank.

These materials are furnished for the use of PNC and its clients and do not constitute the provision of investment, legal, or tax advice to any person. They are not prepared with respect to the specific investment objectives, financial situation, or particular needs of any person. Use of these materials is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading these materials should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended herein and should understand that statements regarding future prospects may not be realized. The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information presented nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal.

The PNC Financial Services Group, Inc. provides investment consulting and wealth management, fiduciary services, FDIC-insured banking products and services, and lending of funds to individual clients through PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and provides specific fiduciary and agency services to individual clients through PNC Delaware Trust Company or PNC Ohio Trust Company. PNC provides various discretionary and nondiscretionary investment, trustee, custody, consulting, and related services to institutional clients through PNC Bank, and investment management services through PNC Capital Advisors, LLC, an SEC-registered investment adviser and wholly-owned subsidiary of PNC Bank. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

PNC General Disclosure https://www.pnc.com/en/corporate-and-institutional/pnc-general-disclosure.html

PNC Capital Markets LLC ("PNCCM"), member FINRA and SIPC, is a wholly owned subsidiary of The PNC Financial Services Group, Inc. (“PNC”) and affiliate of PNC Bank, National Association (“PNC Bank”). PNCCM is not a bank or thrift, but rather, it is a separate and distinct corporate entity from its bank affiliate.

This document is for informational purposes only. No part of this document may be reproduced in any manner without the prior written permission of PNCCM. The information contained herein is based on information PNCCM believes to be reliable and accurate, however, no representation is being made that this document is accurate or complete and it should not be relied upon as such. Neither PNCCM nor its affiliates make any guaranty or warranty as to the accuracy or completeness of the data set forth herein. Opinions expressed herein are subject to change without notice.

PNC Capital Markets is the marketing name used for investment banking and capital markets activities conducted by PNC through its subsidiaries PNC Bank and PNCCM. Securities underwriting, sales and trading services are provided by PNCCM. Foreign exchange and derivative products are obligations of PNC Bank, National Association.

PNC Capital Markets Disclosure

Important Investor Information – Securities, insurance, foreign exchange, and derivative products are:
Not FDIC Insured • Not Bank Guaranteed • Not A Deposit
• Not Insured By Any Federal Government Agency • May Lose Value

Swap Dealer Disclosure

“PNC” is a registered mark of The PNC Financial Services Group, Inc.