First a few items from the press over the course of the day put together by the author of note who will tell us tomorrow what we missed ‘while we slept’,
Fed Weighs Proposals for Eventual Reduction in Bond Holdings (WSJ) A Hawkish turn from Fed’s Kashkari (Medium op-ed) OPEC+ Agrees to Revive More Output (BBG) Flight Cancellations Pile Up (BBG) U.S. Housing Market to Surge 14% This Year, Brokers say (BBG)
Same shop who’s positions monitor (RPM) I’ve come to know and love (and seem to have missed latest update), offers this
Our CETs CTA model shows systematic funds are 'max short' Treasuries alongside the strong performance in risk assets. The short covering threshold for TY futures has extended out to 130-16 (vs 129-19 TY ref). Whilst the RPM still shows accounts are just barely long (0.1 normalized) in TY, but going underwater at current levels.
On the continued move HIGHER IN 30yy, a couple levels noted,
30y yields: daily: a daily break-out above the 200dma and bull trend-line from the March yield highs. Next support at 2.17% (OCT highs), then 2.51% (March peak).
From another of those who write about the rates market 2x each and every day (where I found writing a morning comment to be MORE than plenty),
4p closing prices,
A couple of economic visuals from the day that was,
And some words from John Herrmann in his new (to me?)seat
…In our Year Ahead Note, we highlighted our base case forecast of the 30-year Bond yield tracking a 2.35% rate before year-end 2022 – and recent price action there may suggest that such a target may become a shared view amongst clients (as the year progresses). The fundamental basis behind our Bond yield (and entire yield curve call) remains an economic and inflation outlook that is more constructive than either the market consensus or the Fed’s median SEP projections. We also think that the risks lean toward a year-end U3 unemployment rate that is closer to 3.00% than it is to the FOMC’s median projection of 3.50%. Incidentally, the Committee’s projection (3.50%) is more constructive than the Bloomberg median estimate (of 3.60%).
Should those expectations become increasingly evident over time, then the lift-off in belly yields may catch up to the early move we are witnessing in the Bond’s yield, we believe…
And as the saying goes, I’ve saved the best for the last,
BMO Close: 2022 - In Like a Bear
Tuesday’s price action was in line with the higher rates thesis that we brought into the new year; while we see 2-handle 10s as very achievable during Q1, the severity of the initial selloff risks stalling out at the current pace. Stochastics are now decidedly into oversold territory for all the benchmarks – even in 2s. This speaks to the potential for a period of consolidation to work off the extremes of the price action as opposed to reversal per se. This is more than a nuance; particularly as the move thus far in 2022 has carried the tone of a sustainable repricing as opposed to a simple in-range selloff. Moreover, the Q1 2021 pattern of a series of distinct bearish episodes followed by consolidations led to the step-up character of the last aggressive attempt to establish a higher yield plateau. We’re onboard with the march higher in US rates; with a nod to the fact that we’re risking a give-back in the event rates falter on the path of 10s to 1.704% before challenging 1.77%.
They go on to describe much of the recent move here being driven by acclereted QT (Quantitative TIGHTENING — selling down balance sheet holdings) process of thought behind the aggressive move higher. To whit,
We’re somewhat torn on attributing too much of the move to this dynamic – after all, QT would involve letting the balance sheet run-down ‘organically’ by eliminating SOMA reinvestment of. SOMA rollovers are done outside of the actual auction process and therefore the bigger question is how the Treasury Department chooses to make up the funding shortfall. The 6-month average monthly rollover figure from SOMA is $62 bn – a meaningful number that surely needs addressing. What we struggle with is that for this to be a net steepener, there is an embedded assumption the incrementally reduced rollover auction add-ons further out the curve would be offset by increases to the corresponding auction sizes. Well… maybe? We’re more comfortable anticipating the Treasury Department would endeavor to keep the average maturity of marketable securities stable; which fails to imply a disproportionate impact further out the curve. However, a reversal of auction size cuts could arguably have a larger sticker-shock impact in the land of the big DV01 as the Fed readies for hikes -- this logic works. That said, we’re certainly open to a compelling counter-argument that points toward 1.75% 10s sooner rather than later. And let us not forget the quickly amassing list of large corporate deals that surely need rate-locking given the proximity to NFP and CPI.
One final excerpt which caught my eyes and is simply NOT deniable — the volume behind the move is nothing short of impressive,
… Trading activity continued to ramp up as the market returned from the holidays with cash trading at an impressive 212% of the 10-day moving average…
Whatever the case may be, it may just be that CASES are precisely why rates are up (and the Fed may be deemed ‘allowed’ to sell down it’s balance sheet. Bloomberg,
The Bond Market Sends a Hopeful Message About Omicron. Sharply higher Treasury yields show traders are betting the variant won’t derail the U.S. economic recovery.
… Nowhere is this more evident than the five-year U.S. breakeven rate, which lurched back above 3% on Tuesday. It’s now higher than before Fed Chair Jerome Powell’s “pivot” in late November, when he made clear that the central bank was prepared to fight back against inflation that proved less transitory than anticipated. As market-based inflation measures tumbled in the following days, some observers speculated that simply talking about curbing price growth was enough to make it happen.
…Put it all together, and there’s little reason to expect that the omicron variant will knock the Fed off the course for 2022 that it charted just weeks ago. Three interest-rate increases, starting as soon as March, should remain the central bank’s preferred path. Short-term rates markets are fully pricing in three increases, though starting in May. ..
Until the morning when we find out whatever happened while we slept … wondering IF Asia will wake up TO cheapening UST yields on FX-hedged basis and all of a sudden CARE? Or perhaps stock jockeys somewhere … might??