Holbrook Insights

The yield curve saw modest flattening last week. The short end of the curve continued its move higher and the long end of the curve held steady. The U.S. 2-year Treasury yield increased another 9.7 basis points (bps), closing at 0.967 percent. The 10-year Treasury yield increased 0.6 bps while the 30-year Treasury yield actually fell 0.2 bps. This news may indicate that the move in yields is approaching a near-term ceiling as appetite from investors keeps bond yields in check at this level. We will see if this trend continues and expands to the short end of the curve in the future.

The U.S. equity markets were mixed last week as trends from 2021 started to reverse following the December Federal Open Market Committee (FOMC) meeting. The meeting, which stated the Federal Reserve (Fed) would speed up the rate at which it reduces its asset purchases, led investors to question whether rate hikes would shortly follow the taper, which is expected to end in March. As a result, the Dow Jones Industrial Average and International MSCI EAFE Index began to outperform as communication services, energy, and consumer discretionary struggled. Health care, consumer staples, industrials, and financials started to gain some appetite from investors as high-flying tech and communication services have underperformed after a strong 2020 and 2021.

The yield curve steepened last week, supported by positive news surrounding the Omicron variant and slightly faster-than-expected inflation data. On the short end of the curve, the U.S. 2-year Treasury saw yields pick up 6.9 basis points (bps) after opening the week at 0.59 percent. The back half of the curve also steepened 20 bps as yields on the 30-year Treasury moved from 1.68 percent to 1.88 percent. The U.S. 10-year Treasury saw a pickup of 13.1 bps.

The yield curve continued to rise on the front end and flatten beyond the 5-year Treasury note last week. Near-term inflationary concerns drove the short end of the curve higher and flattened the back end of the curve due to lower future growth expectations amid concerns from the Omicron variant as well as slower global growth. 

Global equity markets fell in the holiday-shortened week after the emergence of Omicron, a new COVID-19 variant discovered in South Africa. The Dow Jones Industrial Average outperformed the more tech-oriented Nasdaq Composite for the first three days of Thanksgiving week by 1.90 percent, but the Nasdaq regained 30 bps after Friday’s sell-off as energy and financial sectors struggled. Oil fell by more than $10 per barrel as demand concerns rippled through the market, while financials were hurt by the drop in short-term yields.

Global markets were mixed amid a rise in COVID-19 cases in Europe and the U.S. The largest beneficiary of this development was the technology-oriented Nasdaq Composite, which was a 2020 darling because lockdowns and remote work affected the sector less than others. Small-caps fell, as smaller businesses and energy were hurt by news of new lockdowns in countries such as Austria. Lockdown-style trading returned at the sector level, with technology and consumer discretionary leading the way, paced by companies such as Apple, Tesla, Amazon, Nvidia, and Microsoft.

Global markets (excluding emerging markets) were down slightly, in part due to inflationary pressure and the recent winning streak for markets. The S&P 500 came into the week boasting a five-week winning streak and finished last Monday up for the eighth consecutive trading day, marking the longest streak of all-time closing highs since 1997.