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. 


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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