o/n; shutting, defaulting and tightening; bond returns now skewed positively? a couple 'bottom lines' as FCI tightens and curve inversion coming; levered bearish bond bets BIGGEST IN YEAR
Good morning.
Risk is on, yields are UP (belly leading ahead of the FED … and they say common sense ain’t so common) and FT reporting
It’s that much smaller highlighted h’line (expanded on by RTRS HERE) which seems to be driving the markets … That in mind, lets jump right in to,
…WHILE YOU SLEPT
Treasuries have been led sharply lower by the belly of the curve as stocks rise ahead of the FOMC and on word of Russia and Ukraine talks optimism RTRS Supply chain fears re-emerged too as China locks down whole regions after outbreaks doubled in the last 24hrs (see links above). DXY is lower (-0.25%) while front WTI futures are sharply lower (-4.8%, see attachments). Asian stocks were mostly higher except in China where they fell hard (Hang Seng -5%, CSI 300 -3%, Hang Seng China Enterprises -7.15%), EU and UK share markets are all higher (SX5E +1.9%, DAX +2.9%) while ES futures are showing +1% here at 7am. Our overnight US rates flows saw good selling from real$ in 10's and shorter during Asia's open, followed by a spate of real$ buying across the curve as prices dipped. when the buyers were sated, prices fell anew and into the London open. Overnight Treasury volume was decent at ~125% of average overall.… With Tsy 30y yields edging above 2.44% this morning, we now have every Tsy coupon benchmark trading above its pre-pandemic rate range highs ahead of the Fed this week (see ch.1). Should 30's close over 2.44% today, we get 2.66% as the next support region for 30's- the summer 2019 rate range highs.
… and for some MORE of the news you can use » IGMs Press Picks for today (14 March) to help weed thru the noise (some of which can be found over here at Finviz).
With this in mind, here are a few observations from the sellside which may be of interest. FIRST is this
The Most Important Observation In Your Portfolio You Probably Aren’t Aware Of
In THIS COMMENTARY, rareview asks IF it ccan get worse
Measuring the distance between the current sell-off (i.e., -6.6011%) and the worst drawdown in 1980 (i.e., -12.737%) argues that the sell-off could get much worse.
Secondly, linking the 1980 drawdown to an event – the Iran Hostage Crisis and Inflation Recession – suggests the drawdown could continue.
Thirdly, evaluating the current bond market drawdown in conjunction with the Consumer Price Index (CPI) points to the same outcome – even more PnL duress if the recent inflation trajectory results in similar price pressures as 1980.
And they offer what it means in as far as portfolio construction
… Finally, bond math portends to positive total returns in short or intermediate-duration fixed income. Presently, the breakeven interest rate by the end of the year for high-grade bonds with a duration between two and five years entails a yield increase of more than 70 basis points, depending upon the maturity. If you stretch the horizon out to the end of 2023, a U.S. Treasury interest rate above 5% is required to lose money.
WHAT’S NEXT
We believe the rate of change for any further bond market weakness will slow dramatically…
OK then. Read on and agree to disagree, if you will. Haters gonna hate but at some point, a war on inflation as a ground war taking place is, well, unprecedented.
MSs weekly stock-jocky’ing: Fed('s) Up: Stocks Vs. Bonds and TMT Wrap
The firm continues in its latest global macro forum, highlighting financial conditions TIGHTENING …
AND a curve inversion is coming …
Never fear, global chief econ (Carpenter) summarizes it all up
Oh, ok … at least, for the Fed, it’s … you know. Different this time…
UBS: Shutting down, defaulting, and tightening
The Chinese city of Shenzhen is in a week-long COVID-19 lockdown. International consumers are unlikely to notice; production will shift, and any delay is roughly the difference between free delivery with Amazon Prime and free delivery without Amazon Prime. However, markets do seem to be nervous about the effectiveness of the zero-tolerance policy, and the potential for future disruption…
BNP: Conflict raises risk of stagflation
… Hedge funds are steadily building up bearish bets on Treasuries as traders brace for the much anticipated start of the Federal Reserve’s rate hike cycle this month. Leveraged fund net short aggregate Treasuries bets across the curve have hit the highest in over a year, according to the latest data from the Commodity Futures Trading Commission. The U.S. Treasury market just endured one of its worst weeks of the past decade, with yields propelling toward their highest levels of the past year thanks to worsening inflation and the imminent expected shift in policy. Bloomberg's gauge of Treasuries fell almost 2%, in the process wiping out the value of their interest payments over the past year. The index has slumped almost 4% this year, more than in any full year on record in Bloomberg data beginning in 1973. If anything hedge funds have been too conservative with their bearish bets, with net short positions just about a third of levels reached in the first quarter of 2020.
… that’s all for now. Off to the day job…