Good morning / afternoon / evening <please choose whichever one which best describes when ever it may be that YOU are stumbling across this weekends 2nd note> …
Israel / Hamas conflicting heating up, Pence is OUT and Rep Dean Phillips is IN (?), shooter in main DEAD and may Matthew Perry RIP … By the time mornin’ rolls around one or another NY (J-E-T-S or GINTS) fan may be somewhat less miserable than the other … although BOTH are gonna be rain-soaked …
Thankfully this weekend the market is closed because on this day / date in 1929, THE crash began …
History.com - Stock market crashes on Black Tuesday
… Stock prices began to decline in September and early October 1929, and on October 18 the fall began. Panic set in, and on October 24—Black Thursday—a record 12,894,650 shares were traded. Investment companies and leading bankers attempted to stabilize the market by buying up great blocks of stock, producing a moderate rally on Friday. On Monday, however, the storm broke anew, and the market went into free fall. Black Monday was followed by Black Tuesday, in which stock prices collapsed completely…
For somewhat MORE, head TO the Wiki
Wikipedia - Wall Street Crash of 1929
Now please, PLEASE do not read this all thinking that any of this is a forecast but rather for some historical context AND perhaps a(nother) reason to give thanks we’re so much better off today, here and now …
We ARE, right?
Nevermind … What IS interesting is this weekend’s Barron’s cover image …
… Cant tell if that’s a statement OR a question and so,
Barrons: It’s Time to Stop Crying About Bonds and Buy Them Instead (message received loud and clear…?)
… The knock on cash and T-bills is that yields will fall fast if the Fed cuts rates next year. Investors could miss out on a big bond rally and would have to reinvest at lower market rates. It’s an opportunity cost—the risk of giving up capital gains if there’s a geopolitical shock or the Fed cuts. Do-it-yourself investors, though, could “ladder” the bonds, buying several at different maturities on TreasuryDirect.gov, at a bank, or in a brokerage account, and reinvesting the cash when they come due.
No matter how you do it, a 5% cash yield may be a bird in the hand worth taking.
While CASH and TBILLS are nice and all, ahead of this weeks COUPON SUPPLY announcement, I thought a look at 20s — ugly red-headed step child of USTs (sorry if any offended) worth a (WEEKLY) look …
Momentum — stochastics — are crossing and doing so in a bullish fashion AFTER trading up and over 5.50% earlier in the week (when Israel / Hamas war … you know … was OVER before it began ?) … So here we are, yields a step or two back away from the edge of the cliff … Are 20s worth a look? May just be (for more see below). Meanwhile, #Got20s?
I wanted to take a(nother) moment or two of your time and update a couple things which have hit inbox SINCE YESTERDAYS POST … in the case airport run tomorrow early gets in way of an update — accept my apologies in advance …
And so, in addition TO some UPDATED WEEKLY NARRATIVES … where it was noted LAST weeks FI thoughts from JPM — staying long 5s and had increased year end targets (have cake and eat it too …) and so I’ll start there …
JPM US FI Weekly (passing update along as you can clearly see in the week just ahead — SUPPLY may very well TRUMP FOMC and NFP)
Treasuries
We’ll sell you the whole seat, but you’ll only need the edge
Treasury yields fell 6-9bp with this week’s domestic data supportive of a soft landing outcome, while Treasury’s end-of-month supply process was mixed
Near-term macro and positioning risks appear manageable, and we continue to hold duration longs in the 5-year sector, given substantially cheap valuations
We remain concerned about the supply/demand imbalance further out the curve and therefore continue to hold 75:6 weighted 5s/10s/30s belly-cheapening butterflies to position for rising term premium
We look for Treasury to announce the second of four equivalent increases to coupon auction sizes at next week’s refunding announcement. Treasury remains underfinanced with its current auction schedule and the T-bill share of debt is already above 20%
While Treasury’s main objective is to fund the government at the lowest cost to the taxpayer over time, we don’t expect Treasury to reconsider increasing coupon auction sizes as it aims to operate in a “regular and predictable manner”. Pivoting away from existing guidance would run against this objective, risking reduced credibility in the process
The PD questionnaire asked for dealers’ views on scheduling buybacks as well as on making the 6-week bill a benchmark tenor. We expect Treasury to make the 6-week a benchmark bill tenor
… Looking ahead, the macro calendar gets more interesting next week, with Treasury’s quarterly refunding process as well as the BoJ and FOMC meetings, but we see limited room for yields to move higher on these events. Starting with the the quarterly refunding process, we expect Treasury to announce the second of four rounds of increases to coupon auction sizes, similar to the ones that were announced in August. As a reminder, 30-year yields rose 19bp and the broad curve twisted 29bp in the first week of August, during the quarterly announcement process. However, we do not expect a similarly bearish reaction to what took place in the aftermath of last quarter’s announcement. Indeed, this quarter’s announcement should be less surprising to market participants, amid continued guidance provided by Treasury, Treasury Secretary Yellen’s attribution of the recent move to higher yields to economic strength, as opposed to deficit concerns, and the growing consensus around a longer QT process (see “November refunding preview” below). Importantly, even if the details of next week’s announcement were to surprise market’s expectations, which we see as unlikely, we would expect any bearish reaction to be concentrated further out the curve, increasing term premium, much like what happened in August…
… Further, turning to positioning, our Treasury Client Survey has extended further long this week, but is not as stretched as it was this summer (Figure 8Positng hasurned omwhatlng, butisno aretchd asitwurng hesumr). Importantly, the 1-year z-score of the index is currently at 0.92, well inside levels that we have historically found to be a significant contrarian trading signal (see Survey says: Using the Treasury Client Survey to predict rates moves, 7/21/23).
Moving along and back to / thru the ‘inbox’
Apollo - The Age of Free Money Is Over (not just Department of Treasury and buybacks in week ahead …)
There is downward pressure on buybacks because of worries about a recession, the new tax on buybacks, and higher cost of capital.
These three forces make free cash flow more valuable for companies, see chart below.
Citi US Rates Weekly, “Supply trick or Fed treat” (jumping straight to reFUNding tidbit which caught MY eyes)
…Overview: Supply trick or Fed treat
Supply anxiety might be peaking, and once the refunding announcement is out of the way, and with the Fed going on pause again, we think Treasuries could catch a break next week.… Into next week, another trade that we like is buying the highest yielding point on the Treasury curve, i.e. the 20y vs. the wings (10y and 30y, level 55.8bp as of 4pm on 10/27/23 … ) … There is a refunding angle here as well – we believe the Treasury will continue to increase auction sizes in the 20y by lesser amounts than in the 10y and the 30y, given the cheapness of the 20y point and the lack of natural buyers. The fly cheapened up with the steepening of the curve, but has slowly started to turn around, and we think that the performance is likely to continue going forward …
MS - Sunday Start | What's Next in Global Macro: Breadth Leads (head stock jockey speaking, we normally all listen / read and cannot wait to see what his weekly warm up says but … a preview)
Over the past month, we have been arguing that the chances of a 4Q rally have fallen considerably. Our observations on narrowing breadth, cautious factor leadership, falling earnings revisions and fading consumer and business confidence tell a different story than the consensus, which sees a rally into year-end that's based mostly on bearish sentiment and seasonal tendencies. While we acknowledge that sentiment deteriorated in September, it recovered this month on the expectation of better 3Q earnings and seasonal strength into year-end. In our view, the fundamental setup is different than normal this year, with earnings expectations too high for the fourth quarter and 2024, even in an economy that’s performing well. Monetary and fiscal policy are unlikely to provide relief and could tighten further. More specifically, as our economists believe, while the Federal Reserve may be done hiking for now, it is a long way from easing. Furthermore, Fed tightening over the past 18 months is just now starting to be felt across the economy…
… In our view, the strength in the headline labor data masks the headwinds faced by the average company and household that the Fed can't address proactively. This is one reason why market breadth continues to exhibit notable weakness. While some may interpret this as a bullish signal – i.e., oversold conditions – we believe it’s more a reflection of our view that we are still against a late cycle backdrop where earnings remain at risk for most companies. Further support for that view can be seen in earnings revision breadth, which is breaking sharply lower again into negative territory and tends to lead NTM EPS forecasts (Exhibit 1).
… Bottom line, we think the S&P 500 price action into year-end is more likely to come down to where the average stock is trading rather than rallying to higher levels because breadth typically leads price (Exhibit 2). Based on our fundamental and technical analysis, we remain comfortable with our long-standing 3,900 year-end target for the S&P 500, which implies a 17x multiple on our 2024 EPS forecast of approximately $230.
Yardeni - DEEP DIVE: What's Driving Bonds? (only get access to 2.5 of 7 ‘points of light’ … rest are behind the paywall but …)
… 2/7) Is 5% high enough?
The question now is whether the 10-year Treasury bond yield, at 4.93% on Friday, is high enough to attract sufficient bond buyers to equilibrate the market’s supply and demand. We think so. The 10-year yield is back to the highest reading since June 2007 (Fig. 1 below). We’ve previously characterized the bond yield range of 4.50%-5.00% as a return to the old normal range before the Great Financial Crisis from 2003 through 2007. The big difference between now and then is the size of the federal deficits, which is partly attributable to the rapid rise in the net interest outlays of the federal government.
(3/7) Bond Vigilantes more powerful than ever…
BARRONS (above) seems to think 5% IS in fact, ‘high enough’ … Only TIME will prove who / what is going to be right side of history …
That’s all I got … Before hitting send a couple halloween costumes been kickin’ around
I could go on but that won’t help … and so, THAT is all for now. Enjoy whatever is left of YOUR weekend … Back tomorrow OR Tuesday if not…
You wouldn't believe all the "help in this tough economy" ads I heard driving while listening to NFL radio yesterday. In spite of the the Q3 GDP read.
I recall Mr. Diamond's incoming "economic hurricane" call about a yr ago as it's reported he's selling JPM shares for the 1st time in his 20 yr CEO-ship. World's more dangerous, and rates are lots higher in the last yr, just sayin'.
Love your Headline !!!
FEAR INDEX shows Extreme Fear....."Buy when there's Blood in the Streets"
I agree.
The 10 yr does seem to struggle near 5 %...
Holding my breath for the Treasury Refunding....hope the Bond Market has it "priced in"....BUT ????
Nice 1929 Historical context......(it could be a lot worse)
Sad about Matthew Perry, seemed like a decent guy...died way too young.
Mike Pence, also a decent guy, but a Uniparty Favorite, not Sad about him.
Thank you for your Expertise.....