(light UST volumes and NOT shocking news from Saudi's) while WE slept; 'trading cpi'; USTs > Schatz, bobls, "Buying Wine for the “Duration Party”
Good morning … I believe EVERYTHING I read on the intertubes and you likely know that by now…They are a terrific source of all sorts of information and yes, occasionally that curve bull of MIS information … This morning we’re waking up to news about the Biden admin who’s been draining SPR like a drunken sailor (my dad is former Navy so nothing against drunken sailors) and then there’s this
BREAKING: The Kingdom of Saudi Arabia confirms Biden attempted to coerce them to postpone oil cuts until after the midterms, announce they have rejected his quid pro quo
If yer NOT seeing this sorta stuff — true or false — you may NOT have all the facts at your disposal to which you might NEED to help lead you to your very own conclusions.
This ‘news’ is either Russian DIS / MIS information OR … this administration will really stop at nothing at all and we should, collectively — Rs and Ds — be very concerned for our own safety and our national security.
OK, back down off the soap box — so sorry for that — and sticking to my RATES LANE (although ‘Earl does matter …)
How about that 10yr auction, eh?
As JEFF put it, “10-Year Note Reopening Results: 1.7bp Tail... Bidders Skittish Ahead of CPI Tomorrow”. For somewhat MORE (or less) via ZH, “Ugly, Tailing 10Y Auction Stops At Highest Yield Since 2009 As Foreign Buyers Flee”. FLEE … ok, makes sense to ME. Except, well, if you believe what ZH noted from yesterday’s FOMC meeting mins which, “FOMC Minutes Show Hawkish Fed Warn "Cost Of Doing Too Little Outweigh Cost Of Doing Too Much".
IF you are a believer then perhaps 30yy are your thing?
… get those bids in early and often … here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are marginally higher, underperforming Gilts (30y -22bps) & EGBs (10y BTPs -7bps) after sharp UK curve bull-flattening on Kwarteng’s expansion of BoE’s APP envelope +100bn, ‘sources’ articles about a Truss replacement and corporate tax rate increase, as well as BoE’s Mann endorsing a ‘front-loading’ hike path. Overnight, there was no JGB 10y current issue trades for the 5th consecutive session, a rather easy absorption of ~460k/01 of TY block sales (amid some ‘wingy’ downside protection trades going through in SFRV2 put spreads), while a €537/01 Bobl block buyer at 3:45am was behind EGB outperformance vs USTs. Risk-assets are seeing a positive drift pre-CPI after going out at the lows/’wides’ in stocks and credit at yesterday’s close (ES futures +0.5%, DAX +0.6%), while the DXY is marginally lower (-0.2%) and commodities are marginally higher (BCOM +0.2%). UST volumes are 65-75% average across the curve, bonds (115%) a bit more active.
… and for some MORE of the news you can use » IGMs Press Picks for today (13 Oct) to help weed thru the noise (some of which can be found over here at Finviz).
STILL waiting for Dr. Hunt and so a few items to funTERtain before / after CPI and through 30yr supply.
First, from Ven Ram of BBG (via ZH)
Financial Crisis-Era Warning Bell Chimes For S&P 500
A warning bell that was heard before the financial crisis is ringing again on Wall Street: dividends on US stocks adjusted for the safest yields investors can buy are the most negative in years.
The dividend yield on the S&P 500 Index is a negative 240 basis points after adjusting for two-year Treasury rates, suggesting that there isn’t a persuasive case to invest in stocks just yet. That is eerily similar to the situation that prevailed in 2006 and 2007, before stocks slumped 38% the following year.
While it may be tempting to attribute the plunge in stocks that we saw in 2008 to the impact of the financial crisis, history suggests that the anemic performance of the S&P wasn’t a one-off occurrence. Stocks were similarly pricey in 1992 and continually from 1994 through 2001, and the table below captures the subsequent period returns of both stocks and Treasuries:
A recent analysis that looked at equities as lesser-rated quasi debt securities suggested that the S&P 500 may tumble to as low as 2,934 and the Nasdaq 100 to 9,208 if the markets are right in their assessment of how much more tightening is required from the Fed in the current policy cycle.
If the history of previous tightening cycles is anything to go by, the Fed has, on average, only been able to stop raising rates when its inflation-adjusted policy rate reached a full 200 basis points, compared with a level of minus 145 basis points now.
If that proves right again, stocks may yet tumble despite the considerable 24% slump we have already seen this year.
With the Fed’s benchmark rate expected to climb to levels not seen in years, stock investors should perhaps calibrate their expectations of returns. That may be a sobering prognosis for traders used to compelling returns in the go-go years following the financial crisis, when benchmark rates were hardly punitive and spawned a flight to equities.
The surge in long-dated Treasury yields this year has profound implications for investors’ equity risk premium. In a world where the 10-year yield is around 4%, an estimated earnings yield of about 6% on the S&P is hardly anything to shout about.
Is there a possibility that equities can escape the yoke of history? Much will depend on the Fed’s ability to engineer a soft landing of the economy. Specifically, it will mean that the current market pricing of a terminal rate of around 4.65% is right, meaning inflation will be contained, thus obviating the need for an even stiffer Fed funds rate. The US economy will also need to avert a recession for stocks to not take another significant leg down.
All told, while the correction in stocks seems brutal, there may be considerably more to come. As JPMorgan Chase & Co’s Jamie Dimon remarked, the S&P 500 “may have a ways to go” in its decline, and “it could be another easy 20%”
Setting stocks aside for just a moment and turning back TO Global Wall Street inbox, there’s this on Japanese investor flows
NWM: JPY investor flows: Buyers of USTs in Aug after nine months of selling
Japanese investors were net buyers of foreign long-term sovereign bonds in August, having been sellers for the last six months. JPY investors were buyers of the US and UK (on a limited scale) long-term sovereign bonds; however, they were sellers of all major European, Australian, and Canadian sovereign bonds in August.
Welcome news for sure. In as far as the here and now, this next one might ought to have been the very FIRST one as DB details,
Five of the last eight CPI releases have produced double digit (basis point) changes on the day the US T.note 2y yield. Whether the Fed outlook should swing around on a single CPI by this order of magnitude is questionable, but that the CPI release is now up there as one of the biggest market mover is not open for debate.
Finally, a couple from the CHARTS department. First, THIS from 1stBOS
US Bonds to outperform Germany
* We believe US/Germany spreads are set to tighten, particularly at the front-end and belly, after a period of ranging for the past several months.
* In particular, the US/Germany 2yr Bond Yield Spread is threatening a potential “head and shoulders” top.
* The US/Germany 5yr Bond Yield Spread also looks close to a sustained period of tightening, with weekly MACD close to crossing below zero.
* 10yr US/Germany Spreads are also pressuring the bottom of their 18-month range, however a weekly close below 150/49bps is needed to confirm further tightening here. In any case, we have higher conviction in front-end tighteners.
* We believe this tightening in spreads could come from higher front-end German Bond Yields, as front-end US Bond Yields stabilise in a high-level range, in line with our recent Q4 outlook.
* Falling US Inflation Expectations, particularly in the belly should also help to cap US nominal yields, whilst German/European market-based measures of inflation expectations are actually moving higher within a range.
HERE are a few
from Scott Grannis — a former WAMCO economist who apparently still has his Terminal … and while MOST regular people likely haven’t seen these — and so, they are quite worth a point and click — these are some standard operating procedural visuals for ‘the pros’ out there. Now that I’m just regular folk (ie sans Terminal), and a casual observer, I’m specifically interested in Chart #8
Chart #8 is the key to understanding the current state of the housing market. The top half of the chart compares the national average rate on 30-yr fixed rate mortgages to the yield on 10-yr Treasuries. The two are joined at the hip most of the time, and that's how it should be. The bottom half of the chart shows the difference between the two, which is now at a record high.
In other words: mortgage rates today are extremely high relative to yields in the Treasury market, and this situation is very unlikely to last much longer. Prior peaks of this sort were short-lived. Super-high mortgage rates act as a brake on housing prices, since they boost the cost of home ownership. Homes today are very expensive relative to everything else, and there is mounting evidence that home prices have peaked and are now declining. Not surprising. Mortgage rates and housing prices should become more affordable before too long.
I’m EQUALLY as interested in Charts #9 and 10 where #10 deals specifically with that magical $31 trillion number
… Chart #10
What about the burden of all that debt? It must be huge, given the amount of debt outstanding and the recent rise in interest rates. Well, not exactly, as Chart #10 shows. The interest cost of our federal debt is less than 3% of GDP, and that's relatively low by historical standards. It's going to rise, to be sure, since the federal government is still running big deficits. But rising interest rates only affect debt that is issued currently, not the great bulk of the debt that was issued at lower interest rates, so interest costs are going to rise slowly. And don't forget that nominal GDP currently is rising by leaps and bounds: third quarter real GDP is likely to be at least 2% and on top of that we will likely see at least 5-6% inflation. At an annual rate, nominal GDP is increasing by at least $2.5 trillion per year, while the deficit is increasing by about half that. So we're not spiraling out of control.
But of course we would be far better off if we weren't spending so much. The deficit today is not due to tax revenues, which are exploding higher, but out of control government spending, which acts to slow the economy because most of that spending is wasteful.
With all this talk of national debt and its costs, I’ll end with a drink because to get through this all, we’re gonna need some sorta ‘crutch’. Sorry. Not sorry. And for this, I’ll turn TO the folks at WisdomTree who are apparently starting early and often.
Buying Wine for the “Duration Party” in our Model Portfolios
Extending Duration; Remaining Cautiously Short
<have cake, it it too, with a large cocktail?>
… While volatility in both interest rates and credit spreads remains elevated, the income is back in fixed income markets.
… Conclusion
As interest rate volatility remains elevated, we continue to monitor fixed income markets and the trade-offs between risk and potential returns across sectors.
While we maintain our preference for shorter duration exposure, intermediate and longer-term yields may now be less vulnerable to rising rates than they were a year ago.
With this in mind, our Model Portfolio Investment Committee moved to extend the maturity profile of our fixed income portfolios, partially closing the existing short duration position. We still would rather be late than early to the duration party and liken this first step to buying a bottle of wine before arriving.
Lastly, as the relative yield premium of high-yield municipal bonds has diminished, we reallocated from this sector into investment-grade corporate bonds within our Multi-Asset Income Model Portfolios.
… THAT is all for now. Off to the day job…