news, while we slept and an extremely short view
What follows is a table setting of rates strategy for those in the daily knife fight and from one who writes about rates twice daily. Literally has become a show about nothing.
Top News: Omicron May Be Reducing Delta Infections, South African Study Shows (BBG) CDC Shortens Covid Isolation Time (BBG) No extra Covid curbs for England before New Year (FT) >$12tn raised in ‘blockbuster’ year for global capital markets (FT) Spanish Treasury Plans to Reopen Green Bond Issue Next Year (BBG) Scientists Expect Omicron Wave Will Peak In January (ZH) 20% of professional truck driving jobs globally unfilled (BBG) Fauci says U.S. should consider domestic flight vaccine mandate (Rtrs)
…Bloomberg estimates the following duration extensions for Jan. 1 as of Dec. 20: U.S. Treasury: 0.06yr / U.S. MBS: 0.11yr / U.S. TIPS (Series-L real): -0.04yr
WHILE YOU SLEPT
USTs are modestly weaker on exceedingly light volumes, strong IP data out of Japan underpinning a broadening risk-on move across Asia overnight (NKY +1.4%) and European markets (DAX +0.3%). EGB peripherals (10y BTP +3bps) are slightly underperforming here, while energy markets are extending higher (Crude +1.6%, NG +1%) alongside gains EM futures and commodity FX (MES +0.2%, AUD +0.2%). Little flow activity to report, TYH2 trading just 63k contracts so far by 7:15am.
MORNING MUSINGS
The tryptophan hasn’t worn off just yet, USTs unmoved and trading 25-35% volumes (30d) before the US open, though US equity investors appear to be taking comfort in a perceived ‘January Effect’ as the S&P 500 looks to notch its 70th ATH of the year. Crude oil is now also sitting back above the early-OCT breakout area above the July highs at ~75.50, a tactically constructive development. But of course, in a year defined by a historical excess of liquidity ($12.1trn raised via equity / supplied in debt), there’s still plenty of capital looking for an ‘imperfect but substitutable’ home out the risk curve. With 10y real rates still comfortably in the lower 1/3rdof their 2021 range, and nowhere close to the 1% level that exposed risk-assets during the ‘autopilot’ taper in 2018, the Bernanke-an Portfolio Balance Channel effects remains alive and quite well (linkto Bernanke’s speech on the subject). That said, we suspect 2022 will be year of ‘stock vs flow’ friction as this BBG piece ‘stimulus no more’ and Citi’s Dr. Mo’s touted ‘liquidity framework’ suggests.
10y real rates: a zoomed-out weekly chart shows the budding positive divergence in RSI momentum (higher lows) as real rates plumbed new lows in 2021, potentially indicative of a multi-year bottoming pattern being formed. The key levels in order of significance are -93bps (trend-line support and 50wma), then -51bps (2021 range-highs), then -5bps (2019 pre-covid range lows).