(belly outperforming on muted volumes ahead of NFP)while WE slept; beware the SPIN -- NFP and the 'dash for cash' (biggest 1d OUTFLOW from SHV)
Good morning … Little to add TO muted volumes / flows overnight — as they should be ahead of today’s NFP and so, here is a snapshot OF USTs as of 658a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are mixed and the belly outperforming ahead of today's employment report (Citi +190k and unemployment rate holding at 3.5% with a risk of a slip to 3.4%). DXY is lower (-0.35%) while front WTI futures are notably higher (+3.3%) this morning. Asian stocks were lower in Japan (-1.7%) but higher elsewhere and especially China (links above), EU and UK share markets are all in the green too (SX5E +1.6%, FTSE 100 +1%) while ES futures are showing +0.75% here at 6:30am. Japan returned from holiday to a muted Treasury session with the curve showing a bull steepening bias amid some block sales in TY's. Then during London's AM hours more block sales were reported but in TU futures (5k followed later by a 7.5k block). Overnight Treasury volume was about 80% of average overall except in 2yrs which saw 129% of average volume overnight.… For duration we'll pick on Treasury 5yr notes this morning and show you how 5yr yields are back up to the bottom edge (~4.37%) of the range in 5's (4.37%-5.235%) seen during 2006 and 2007. So there could be some support for 5yrs near this morning's opening levels, via the bottom of that former range, with the October 21st move high a hair above 4.50% a presumed support after that.
… and for some MORE of the news you can use » IGMs Press Picks for today (4 NOV) to help weed thru the noise (some of which can be found over here at Finviz).
In as far as a few other items which may / may NOT be of interest to YOU, I thought the other side of the gloom crew coin might be in order. Hedgopia,
Pivot Party Pooped; At Some Point, Selling Needs To Be Faded In Seasonally Strong Period
On NFP via UBSs Paul Donovan notes,
Spin will definitely triumph over substance
The US employment report is due on Friday, when a set of inaccurate economic numbers are treated as if they have pin-point precision. The data will be revised substantially, but this close to the mid-term elections expect a frantic spin-cycle around the numbers. Job creation is likely to have slowed, and real average earnings will remain extremely negative.
Perhaps the most important narrative of the labor market data is its complete inconsistency with the narrative of the GDP data. Apparently, the US created 2.1–2.6 million jobs in the first half of the year, when growth fell, and then 0.4–1.1 million jobs in the third quarter when growth accelerated….
Here are a couple TECHNICALLY inclined thoughts / charts on CURVES (via 1stBOS)
A final leg flatter for intermediate US Curves
* We believe there is scope for a potentially final leg flatter in the US 2s5s and 2s10s Bond Curves, as per the view in our Q4 outlook.
* Post the FOMC meeting last night, we have seen modest flattening pressure, with the US 2s5s Bond Curve increasingly close to confirming a clear bearish “triangle” pattern.
* We believe this potential bearish continuation pattern in 2s5s is preceding a move below the twice tested intraday lows at -58.5bps in the US 2s10s Bond Curve, which would similarly confirm a bearish continuation pattern.
* In terms of our outright view on yields, we retain our medium-term neutral stance on duration, and we believe further curve flattening should limit the upside potential for nominal yields.
Something that didn’t cross MY path until just late YEST and was offered ahead of the FOMC (and likely got play elsewhere — ZH for ex), some BOND TECHNICALS from BAML
US 10Y - Sell the rallies, not the breakouts
Key takeaways
We maintain a view to sell 10Y US treasury on rips such as the next wave lower (in yield) to the 3.90-3.65% retracement area.
Stretched momentum remains our greatest risk/concern of a larger snapback = sell rips, not breakouts.
Three peaked RSI divergences key to signaling yield tops, but not there yet. Average correction since March 2020 is -57bp.
… No yield top yet, but this is how they tend to look
10Y yield tends to top with a head and shoulders, double top or rising wedgeChart 2: US 10Y Yield - Daily chart - Theoretical top patterns to be on watch for now or later
Eventually a top pattern will form. As of writing, none of these are valid tops rather examples of what we are used to seeing to signal a larger trend change and what we can only be on watch for given how stretched the monthly chart momentum is.
Not so much a technical take but some historical context of 2yy dating back to 1990 via Nick Colas of DataTREK
Topic #1: Two-year Treasury yields went to new highs today, so let’s look at the yield history of this paper back to 1990 with this chart:
Two points here:
The speed of the ascent for 2-year Treasury yields over the last year has no precedent over the last +30 years. A year ago, 2-years yielded 0.4 percent. Now, they are 4.7 percent and still climbing quickly.
While the current inflationary environment is unlike anything the US economy has seen since the 1970s, historical 2-year yields since 1990 can give us some sense of where they might at least take a breather. As noted above, in 2006 – 2007 2-years peaked at 5.0 – 5.3 percent. In the 1990s, they averaged 5.5 percent and peaked at 7.7 percent at the end of 1994.
Takeaway: today’s spiking 2-year Treasury yields are due to yesterday’s Fed Chair press conference, where Powell explicitly said the FOMC is revising upward its view on where Fed Funds will eventually peak. He did not offer up a view on peak rates, however, so markets are left to their own devices at least until policymakers weigh in on this topic. The history above is some guide, and it says 5.0 – 5.5 percent is a reasonable level to note. All that seems certain is that until 2-year yields stabilize equities will remain under pressure…
Technicals then aside for a sec, I’ll turn TO Harley THE MOVE MAN Bassman who just offered,
"A Deep Dive into Mortgage Bonds"
… Here I trace the MBS pipeline from the loan application to its purchase by a Mutual Fund. I then detail the MBS valuation process. The timeliness here is that MBS have only been this cheap during times of significant financial crisis (2008/09 and 2020) - which is not the case currently.
In preview, I offer why I am going to "call the bottom" for MBS relative to USTs, and their levered cousin the Mortgage REIT.
… Time to buy Mortgage REITs ?
At this point, we must be sniffing a bottom for MBS versus UST rates. Almost every risk vector is near its peak, and one is earning 60bps (OAS) on top of that…
… I will not say buying a pure mREIT is the “best” way to capture the value of MBS, but rather it is the most leveraged manner. Pure play mREITs do not take credit risk and have no exposure to MBS production or Servicing. They simply purchase $6 to $9 of MBS to every $1 of capital, and then try to hedge out market volatility via the trading of interest rate derivatives (Swaps and Options).
Most important, at current spread levels, their income should increase.
The massive caveat is a violent market forces a margin call and a fire sale of assets. This is what happened in March 2020; but many of the mREITs have adjusted to term-funding via preferred stock or improved covenants…
… Closing Comments
As first offered in “Crash Test Dummies” - October 4, 2022, the FED’s projected (DOTs) peak rate of 4.60% will not be breached as we are likely to realize a recession by Spring 2023; one year after the curve first inverted in April 2022.
More salient is my favored relationship of the -Пурпуровий line- FED Funds rate (3.88%) crossing the -лайм line- five-year forward five-year rate (3.85%). This further supports the notion that the FED will not offer too many more surprises.
The caution here is that rates above 4% has reversed the -оранжевий linecorrelation between stocks and bonds, and thus 60%/40% will not offer refuge.
About that 60/40 needing a HUG?
In closing, here are some excerpts from the WEEKLY FIX (BBGs weekly FI news letter) which I thought were worth noting ahead of NFP and the weekend
The Weekly Fix: The Fed Isn't The World's Central Bank Anymore
Still, money has been draining from ultra-short duration exchange-traded funds as of late. While cash-like funds are still on track for a record annual haul, nearly $2.5 billion exited from the $21 billion iShares Short Treasury Bond ETF (ticker SHV) on Tuesday alone — the biggest one-day exodus since the fund launched in 2007.
That follows a wave of withdrawals from other ultra-short ETFs in recent days, perhaps another byproduct of the latest run at the pivot trade — a pipe-dream that sent the S&P 500 more than 8% higher in the weeks leading up to Wednesday’s Fed-induced hosing.
The other interpretation is that investors are ditching cash to venture back into longer-duration debt, fueled by the idea the Fed will hike the US into a recession.
The fun thing about tracking cash is that it could go either way.
“Some of those people might be saying, ‘We’re about to go into a recession, let’s go long Treasuries,’” said Tim Murray, capital markets strategist with T. Rowe Price’s multi-asset division. “There might be others that say, ‘The market’s bottomed, the Fed’s about to pivot, let’s get into equities.’”
I’m HOPEFUL to put forth some effort this weekend BUT … traveling TO Coast Guard Academy for Thing 3s Sat afternoon match up and catching up on some missed family time from this past weekend. As always, time / weather permitting, I’ll attempt to spamify your inbox with a thought (sellside observation) or two ahead of Sunday evenings market open …
… THAT is all for now. Off to the day job…