o/n (good long-end buying despite 'still challenging liquidity); shorts being squeezed but no losses yet, they say; Waller; Ali v Liston, Russia v Ukr? and Happy Rubber Ducky Day ... #gotGAS?
… The pace of tightening will depend on the data. One possibility is that the target range is raised 25 basis points at each of our next four meetings. But if, for example, tomorrow's PCE inflation report for January, and jobs and CPI reports for February indicate that the economy is still running exceedingly hot, a strong case can be made for a 50-basis-point hike in March…
-Governor Christopher J. Waller (yesterday, on the off chance you missed).
This mornings data combined with NEXT Friday’s NFP then, are of increased importance. And with THAT, I’ll TRY and be real quick with just a short note ahead of this weeks close AND with HOPES to put together something more funtertaining over the weekend. For NOW, though, here’s what happened,
WHILE YOU SLEPT Treasuries are a hair lower and the belly a touch cheaper as markets brace for an active two weeks of rates-related events and whatever unfolds geopolitically. DXY is little changed while front WTI futures are ~UNCHD too. Asian stocks were mostly higher after NY's afternoon rebound, EU and UK share markets are all roughly 1.5% to 2.1% (FTSE 100) higher while ES futures are showing -0.65% here at 7am. Our overnight US rates flows saw some decent buying overnight, especially in the long-end, though the desk noted still-challenging liquidity conditions. There will be a front-end Fed buyback later this morning. Overnight Treasury volume was ~120% of average all across the curve.
Got it … good BUYING in above avg volumes and focus on long-end despite ‘still-challenging liquidity’. The same group continues with some news and a chart of 20s which caught MY eyes,
… US News: Fed Governor Waller said late yesterday that he thinks that a Fed balance sheet of 8% of GDP is a good target. He also added that he favors an all Treasury balance sheet- so no MBS or.. "get rid of that stuff" WSJ Waller also laid out the case for the Fed to go 50bp in March. CDC to release new Covid-19 mask guidelines today WSJ
… Treasury 10s20s30s 'fly: The ~50bp area remains the range high (20's cheap on curve) that has capped moves since last summer. This 'fly has dropped back this morning- perhaps now that 'stop'out' paying in 20's that our desk reported yesterday has come and gone? Anyway, we wonder aloud if Treasury might be a wee bit bummed that 20's remain at mid-summer levels in this 'fly despite the ax that they've taken to 20y issuance since late last year?
And moving on TO what’s readily avail for us normal, disinterested humans on sites like CNBC
… and for some MORE of the news you can use » IGMs Press Picks for today (25 FEB) to help weed thru the noise (some of which can be found over here at Finviz).
A few MORE links / thoughts / visuals which may be of interest (or help as a distraction)
Unstable global macro / CTA setup (short rates and equities) => these regimes do not persist historically.
Largest shorts/profits in Eurodollarand 2yr TU - profit squeezed but still intact => short momentum dominates with next critical levels at 98.20
Extended short in 10y (at $22m / 95th percentile) with short offside above 127-00 => with next resistance at 127-19 where losses build => belly the most vulnerable
Mild shorts in 30y (at $4m / 55th percentile) / extended long in fast 1mth => balanced risk with shorts onside below 186-16 and recent longs onside above 182-00
Cross Market: Extended Long TY/Short RX and in profit below 177bps (think this is vulnerable)
OTR/OFTR spread are stabilizing over the last few sessions => No panic in UST market function
Liquidity: Tcosts rising to x2.0 andtop of orderbook still impaired particularly at the front end(at 10th percentile)
… FLOW THOUGHTS Into the FTQ bid the market was extended short, and we have seen short profits squeezed and a liquidity drain from the market. Fade or follow? Clearly intra-day price action is volatile / headline driven and typically richening of more than 1pt in 10y TY do typically have a bias to cheapen over the subsequent sessions for nibble fast money, but timing is critical!
So where are the risks? At the front end, extend short and profits still remains in play (at around 30bps) => short momentum to dominate but risk/return improving to fade recent flattening along the strip. In the belly, profits have now flipped into small losses (by around 3bps) but larger moves required to drive capitulation. Meanwhile, at the long end of risk are more balanced which recent longs now 10bps onside.
In our own flows we saw initial buying in 10s and 30s but as yields moves to session lows we saw selling by CB/HF and profit taking by Banks on longs. Are CTAs involved? Not yet, with CTA still max short across the complex with a further richening of 10bps required before they start to trim shorts (with the long end most vulnerable).
The final component is liquidity which is clearly challenged prior to today’s moves with TCost rising to around x1.5 historical averages and order book close to the lows. However, market function remains intact with the recent OTR / OFTR widening (driven by dealer inventory as QE ends / poor liquidity landscape) stabilizing despite the price action.
… There was some big ranges though. 10yr US real yields were -27.7bps lower and breakevens +14.4bps wider as news of the invasion, and commensurate stagflation fears hit. However, the intraday turn around led to much more modest closing levels, with 10yr real yields -4.2bps lower and breakevens +1.5bps higher. 10yr nominal Treasury yields settled -2.8bps lower on the day at 1.96%. At shorter tenors, 5yr breakevens also displayed a remarkable intraday roundtrip, finishing +1.4bps higher after having hit an intraday peak +24.8bps wider at +3.39%, which would have been the highest reading on record. In Europe the breakeven widening was more sustained, and the 10yr German breakeven actually managed to close above 2% for the first time in over a decade yesterday, having climbed +12.9bps to +2.10%. Meanwhile nominal yields on 10yr bunds (-5.8bps), OATs (-7.0bps) and gilts (-3.2bps) all moved lower…
MSs Friday Finish (an earlier than early edition):
Geopolitical Risks and the Fed. Amid rising geopolitical risks, central banks must weigh the trade-off between growth and inflation. The Fed looks through energy price effects on inflation to focus on the impact to GDP. If downside risks to the outlook prevail, slower growth should slow inflation.
… Employment Report (Friday, 8:30am): Following a strong 467k beat in nonfarm payrolls in January, we forecast another strong month for job gains. Total nonfarm payrolls are expected to increase 730k in February, while private payrolls should increase 690k vs. 444k prior. We expect job gains to be most concentrated in sectors adversely impacted in January from Omicron, such as retail trade, leisure and hospitality, and transportation. An increase in the employment in line with nonfarm payrolls would imply a 8bp increase in the labor force participation rate to 62.3%, lowering the unemployment rate 30b to 3.7%. Average hourly earnings are forecasted to soften somewhat, in part driven by a reversal of the upside calendar bias in January. When the 15th of the month falls within the payrolls survey week (including 12th of the month) there is a 15-30bp upward bias that gets reversed out the following month. We forecast earnings increased 0.4%M, keeping the y/y at 5.7%. The average workweek should increase from 34.5 to 34.7.
BBGs Weekly FIX: Ukraine crisis shakes havens; who said the S-word
… Since surging price pressures don’t pair well with interest-rate sensitive bonds, the flight-to-quality is colliding with a sort of stampede away from assets most exposed to rising inflation. As a result, the expected rally in U.S. Treasuries has found no momentum so far.
What’s more, some keen observers of the world’s largest government bond market reckon we could be headed for another liquidity squeeze. JP Morgan strategists including Jay Barry noted Friday that:
“On a one-week moving average basis, Treasury market depth has retraced to levels last seen late in the winter of 2021 after a historically weak 7-year auction, and otherwise to levels that were only seen only around the worst of market dysfunction in the spring of 2020.”
Speaking of CASH, thinking of a SAVINGS GLUT, read THIS (also from BBG)
The savings glut is alive and well. Demand at recent U.S. debt auctions has been robust, sending the share of sales allotted to primary dealers -- the large banks that are committed to bidding -- plunging to record lows.
This looks to have very little to do with the Ukraine crisis. This trend started well before geopolitics made a serious impact on the market. Buyers are also looking through the near-certainty that Federal Reserve interest-rate hikes will drive up yields in the future and therefore lower the price of the bonds they are snapping up. Yields are still historically low -- and way below inflation -- so this highlights how much cash there is out there. That’s a dynamic that helped fuel the sustained decline in yields before Covid-19, and is set to do so again in a post-pandemic world.
Like CLOSED END FUNDS? Read THIS from RIAs Mike Lebowitz
… With the ten-year U.S. Treasury note yield eclipsing 2%, some bond traders think we are approaching another peak in yields. We know 2% seems low, but bond yields have trended lower for the last 30 years. Within the trend, each local peak in yield was followed by lower peaks as shown below.
With poor demographics, weak productivity growth, and a slew of new pandemic-related debt on the books, we tend to agree that another lower peak is probable.
For those agreeing in a coming bond bull market, we present a road less traveled. Closed-end bond mutual funds (CEFs) have a unique structure that, at times, can produce larger price gains or losses than bonds and higher yields than traditional bond funds or ETFs. If we are correct that yields will decline soon, some fixed income CEFs can produce double-digit returns in a relatively short period…
Finally did you know today was the anniversary OF Ali v Liston? Perhaps another knockout of sorts be coming today and which markets will be anticipating. If said knock-out does NOT arrive, then today’s OTHER important anniversary might be worth making note.
52yrs ago today, Ernie Sings “Rubber Ducky” In the Bathtub
Now, 50 years ago, I was three years old. Yes, I’m old enough to remember when this moment in pop culture actually happened. And when I tell you, this was THE BIGGEST POP SONG OF THE EARLY ’70s and EVERYBODY I KNOW HAD IT ON REPEAT IN THEIR HOUSES and WE ALL SANG IT DAY AND NIGHT… you may think I’m just referring to the other three-and-four year-olds that I knew, but no… it WAS a genuine global phenomenon: After premiering on episode 78 of Sesame Street, February 25, 1970, it spent nine weeks on the Billboard 100 and peaked at #16.
And in addition to being sung on talk shows and variety hows, I remember that EVERYBODY needed a rubber ducky for Christmas that year. And SOME people even had a ROW of rubber duckies in their bathtub to play duckie army or duckie fashion shows or whatever– and those were the luckiest people on the planet.
