o/n; 10yr charts (ahead of today's liquidity event); a(nother) rates f'cast update; The Plumber; Rosie's Strategizer; Lacy HUNT
Good morning and happy humpday!! While this substack effort is continuing to evolve, it is as much like a ‘box of chocolates’ and you really never know what yer gonna get, BUT there are some things that are hopefully to be constant.
An idea of what happened overnight in rates and other markets and a few things to consider for traders, PMs and those generally interested in rates / macro over the coming hours / days and weeks.
Today’s note contains thoughts from not ONLY Rosie but also from Lacy Hunt? Yes, in one single post! I hope you’ll find something of interest and as always, any / all feedback greatly appreciated.
That said, jumping right in as,
Stocks, US Futures Climb as Bond Selloff Eases (BBG Wrap)
And from CNBC some data and MTG APPS
Homebuyer demand for mortgages drops 10%, as higher interest rates price some people out
Nothing without a consequence, am I right? And for those of us relegated to RATES, here is what happened,
Treasuries are higher, the curve flatter and global stocks are higher as 'buy everything' makes a cameo for maybe the first time this year. DXY is lower (-0.18%) while front WTI futures are too (-0.6%). Asian stocks were all higher, EU and UK share markets are all showing green (SX5E +1.5%, FTSE 100 +0.6%) while ES futures are showing +0.75% here at 6:45am. Our overnight US rates flows saw better Asian selling into the uptick (Aussie markets traded OK today despite supply), most of the selling in intermediates and the long-end. In London hours we saw good buying of the long-end from credit-linked names. HF's have stepped in to steepen 5s30s and to pay 30y rate. Overnight Treasury volume was decent at ~120% of average overall with 10's and 3's each seeing 145% of average turnover- leading the pack after yesterday's 3y sale and ahead of today's 10y auction.
AND some news and a FRONT-END chart …
US News: Fauci: 'Full blown' pandemic phase of Covid nearly over in US FT The US House passed a stopgap bill to prevent shutdown Hill US households took on $1tln in new debt during 2021 (most since 2007) WSJ US housing: The mother of all seller's markets Yahoo Big container shipping group says that supply chain problems should ease this year FT Tanker rates turn negative as US LNG flocks to Europe Oilprice Fed's Daly: inflation could get worse before it gets better RTRS There are more commodity futures contracts in backwardation (indicating scarcity) than at any point since 1997 BBG
… Our next attachment updates the 2s-FF spread- now wider than at any time since before the GFC. With the front end of the curve so steep and carry/roll rich ... a migration from overnights out the curve is hardly a surprise?
… for some more of the news you can use » IGMs Press Picks for today (09 FEB) to help weed thru the noise (some of which can be found over here at Finviz). One thing that caught my eye — for better or worse given how my beloved Garden State of NJ has just lifted school mask mandates (early March) — was this one,
Chinese border city outbreak in ‘fast rising’ phase, after 72 new Omicron cases – South China Morning Post A further 72 cases has brought total infections since Saturday to 180 in the city, which is still in the ‘fast rising’ phase. Health officials are concerned about the number of patients who travelled to many places before their infections were picked up.
And now in the fullness of time, we’ve gotten 3yr liquidity event results fully digested,
ZH: Stellar 3Y Auction With Record Foreign Demand Shows Bonds Not Worried About "Six Or Seven" Hikes
NOTED … (record foreign demand then speaking TO concerns noted YESTERDAY), and here are a couple charts rec’d YEST — so they are OLD (like me) by the time you get to consume them — still, the sentiment being expressed by the price action is what is important (as we know, in price there is truth as mentioned yest)
Looks like 1.96 yield is first support. Psychological level of 2% could be interesting and/or an overshoot to 2.01/2.05 area...
But wait, there’s more,
1.971% Roadblock on the Road to 2.0% 10s … In the event 10-year yields push through there, there is little to prevent a swift move to 2-handle territory. The handle-change itself will prove to be meaningful support; although the 2.058% level (peak from Aug 1, 2019) will offer a far more compelling target in the event 2.0% is broken before Wednesday's refunding and Thursday's inflation update in which CPI is seen at +7.3% on a yearly basis. Volumes have been strong this morning with cash trading at 131% of the 10-day moving average; 10s have garnered at 23% marketshare thus far.
10yy WEEKLY … hmm, why does that sound awfully familiar … oh right, they were ALSO NOTED before these hit the inbox HERE yesterday!
Here’s a quick look at 10yy DAILY (via investing.com) to best of my current capabilities, where I’ve noted 1.95 as it stands out to ME as well as momentum — slow stochastics (crossed, rolling over),
Perhaps 1.95% or so is the concession? Stay tuned TO 1pm as the judge and jury will get the facts and decide TODAYS case!
Now with this concept of there being some truth in price action, there’s also a component of global Wall Street catching UP to said price action. By that I mean every time there’s a move (of epic or even modest proportion), the global sellside goes into panic and readjusts FORECASTS so that at some point, then, into the future, they can look back and say, ‘I told ya so’ … OR perhaps they aren’t doing it for that reason and it’s only so as they can, themselves, sleep at night.
Whatever the case may (not)be, another rates forecast update hit inbox and so, from a rather large British outfit,
US Interest Rate Forecast Update – Taking stock of the front-end repricing
Following a slew of hawkish central banks over the past two weeks – the Fed, the BoE and the ECB – front end rates have repriced significantly. However, vast majority of the repricing came in the form of rate hikes being pulled forward, as opposed to an increase in the terminal rate expectations. In this note, we update our forecasts and trades given the pace at which markets have priced in higher yields across the US Treasury yield curve.An update to our interest rate forecast is appropriate, given the sharp upward move in yields over the prior 6-weeks and in the more forceful “pivot”, and seeming “follow-through,” of Chair Powell’s hawkish forward guidance. We think the fundamental themes we argued in our earlier notes still hold (e.g., in our mid-November US Year Ahead 2022, in our mid-January Likely Features of Powell’s QT Program, and forecast updates). Therefore, our core yield curve forecast has not been altered all that much, and our view is still based around:
Expectations for outright higher yields across the yield curve – in comparison to forwards markets pricing and to the median estimates of the Bloomberg survey.
An expectation for the FOMC’s tightening cycle of a “peak” policy rate of closer to 2.50% (vs. the current pricing of ~1.8%)
A continued flattening of the 2s10s and 5s30s yield curves.
Our team’s core strategic investment stance remains, with:
An outright short of the SFRZ3 contract, and
A 5s30s yield curve flattener
While we still anticipate a further 2s10s curve flattening, a large part of the re-pricing in 2s has already occurred, we believe. OIS markets are pricing in just over 5 hikes for 2022 (vs. our teams forecast of 5) and an additional ~2 more in 2023 (vs. our team’s forecast of 4 more) – Chart 1. Given those elevated levels in near-term forwards, the risk/reward for further repricing of 2s10s may be less attractive, at present.
Therefore, we recommend taking profits in the team’s core strategic 2s10s yield curve investment stance (for a net gain inclusive of carry of just over 15 bps), as the cost of holding the position is quite high (closer to 20 bps per quarter), while the upside may be more limited than previously viewed. The 2s10s spread has flattened significantly and forwards markets pricing of a year-end 2022 2s10s yield spread of ~25 bps is very close to our forecast of 20 bps.
So THIS particular update doesn’t provide much that has changed … flatter curves and higher rates are still widely anticipated. Summarized in TABLE 1
What are the consequences GOING TO BE? This remains anyone’s educated guess. I cannot help but think that nothing (higher rates, flatter curves) is without consequence. An inverted curve (not predicted by this shop) means a recession usually not far behind. Sorry, not sorry. As far as higher longer bond rates, well, lets see just how resilient are the auto, housing and overall consumers balance sheets (consumers who’ve got outstanding credit card debt) are. It all remains to be seen.
On the other hand, something that has been seen more often than not, at least lately, is The Plumber (aka Zoltan Pozsar) who’s written extensively on QT and hikes over the past several days / weeks. Yesterday, after the close, this came in,
Global Money Dispatch
Today’s Dispatch is the ninth exploring QT (today’s is another two-pager).In our previous Dispatch, we made a distinction between “beautiful QT” and “ugly QT” – the former means that collateral coming into the system via QT is absorbed by ultimate buyers like real money accounts and banks, and the latter means that collateral is absorbed by levered accounts like dealers and RV funds.
Let’s hypothetically assume that all of QT is ugly. How does that get funded? …
… To summarize, under ugly QT o/n RRP balances get soaked up first and then excess reserves (tighter swap spreads and higher o/n repo rates), and under beautiful QT, excess reserves get soaked up first and then o/n RRP balances.
We’ll dissect the market implications beautiful QT next…
Plumbing, price action and forecast updates aside and on to some OTHER StratEgerizing … literally, from none other than one of (if not)THE BEST … @EconguyRosie who tweeted this gem yest,
@EconguyRosie
Old rule-of-thumb: when the interest rate-sensitive auto and homebuilding stocks begin to scream “uncle!” (correct 20%), it's a signal that Treasury yields have overshot. #RosenbergResearch
7:47 AM · Feb 8, 2022
But that is not all … with UST yields having overshot, in mind, he’s made this Strategizer widely available and so, as they say, sharing is caring. What IS his monthly Strategizer, you ask? Well, in his own words,
… A monthly model-driven report, well suited for active investors. It’s an effective risk-management tool, providing scorecards and expected future returns for global stock markets, equity sectors, bonds and currencies.
And his HIGHLIGHTS
Despite the recent sell-off, our message is the same for equity investors: focus on ex.-U.S. exposure where valuations are more favorable
As such, we remain underweight on the U.S. equity market, although there was a notable upgrade to our model’s score this month
According to our duration model, the recent up-move in Treasury yields is overdone, leading to a counter-consensus overweight call
Conversely, our U.S. dollar model is quite bearish, suggesting a declining profile over the next year, particularly against the Japanese yen and, to a lesser extent, the euro
In our monthly theme, we look at the challenging start to 2022, and how the most expensive stocks have fared the worst
Our research strongly suggests that investors should be focused on parts of the equity market that have retained earnings visibility in this period of heightened uncertainty and have the most alluring valuation support
Jumping TO p3 on USTs which are near and dear to these old rates eyeballs,
• With the recent move higher in yields, our Treasury bond duration model has a counter-consensus overweight call
• This reflects a combination of: i) depressed positioning; ii) bearish sentiment; and iii) oversold technicals, all of which are contrarian positives
• Furthermore, we expect inflationary pressures to have peaked and thus inflation rates are set to subside in the coming months/quarters
• Against this backdrop, it has generally been prudent to have above-average duration exposure
Skipping ahead TO p16 for the Treasury Bond Duration Model,
Highlights
• After the recent up-move in Treasury yields, our bond duration model has flipped overweight
• While valuations remain an ongoing headwind, this is more than offset by a number of positive forces
• Notably, sentiment is extremely bearish and market positioning has moved to an extreme negative posture, both of which have tended to foreshadow above-average returns in the past
• In addition, the Fed’s hawkish pivot is now priced in, meaning a key catalyst behind the move higher in yields has already played outAfter spending the past two months in neutral terrain, our Treasury bond duration model flipped overweight at the end of January — now 75.6 versus 51.2 previously. We fully appreciate this is a counter-consensus call, especially in light of the Fed’s hawkish pivot, but history tells us that long-dated Treasury yields fall, not rise, when Quantitative Easing (QE) comes to an end. In contrast, it is during QE periods when investors should look to minimize duration exposure. This dynamic can be traced to the fact that risk appetite increases when the Fed engages in asset purchases, but fades when they pull back support. We saw this through QE1, QE2, and QE3, and we expect this time will be no different…
As shown below, at current model readings, returns have been slightly above average across all maturities. However, note that returns have been more favorable at the long-end of the curve (+10.6%) than the middle part of the curve (+6.2%), reinforcing our overweight call on duration
Don’t shoot the messenger(s)? Wait until you see it however YOU like to see it — loud and clear — and which ever signals YOU choose, before lightening up on short duration … READ HIS ENTIRE NOTE HERE and decide what you think.
I can / will say this. There are few other INDEPENDENT THINKERS out there and those I’ve stumbled upon over my rates career (1993 - 2021) should be recognized and followed. If for nothing else, another NOT GROUP THINK, view.
Lacy HUNT (latest quarterly HERE) for one example and more recently, EPB Macro’s Eric Basmajian post-NFP thoughts mentioned HERE. These out of the box voices are ones you SHOULD at least be aware of, listen too and again, if nothing else, TRUST their process and appreciate them for what they are.
It is with THAT in mind, I’d mention Dr Lacy Hunt will be speaking TOMORROW, Feb 10th and I’m going to try and log in to catch whatever happens after 5p!
and Harley Bassman has advanced the signup link,
Register here >>> https://us02web.zoom.us/webinar/register/3016390818945/WN_2ROrPSrYS9SSNcvKuGkb-A
I’ve registered and can’t WAIT to hear from the man, the myth himself. And if you, like ME, cannot wait to hear directly from Lacy, well then this,
Despite Current Inflation Fears, Deflation Still The Bigger Threat | Lacy Hunt
… that’s all for now. Off to the day job…