TLINE support and couple closing thoughts ...
Who you gonna believe … ME or your own lyin’ eyes? Here are a couple visuals of 10yy and 30yy approaching yield support and offered in addition TO what we’re supposed to take away from DAY 1 of trading (ie not much).
In BOTH cases, momentum (stochastics) appears to have moved swiftly into overSOLD territory. This is NOT to suggest a quick (mean reverting) move LOWER is needed. Especially NOT ahead of FRIDAY (NFP). Time at a price *could* work off the overSOLD status, just the same.
Now with THAT in mind, a few words from our sponsors … those who have to write 2x a day about US RATES. First from the desk offering what happened while we slept,
…After a long year of spurned rates orthodoxy, 2022 began with a proper terminal proxy re-rating (3y1y OIS +14bps), but one day a trend does not make. Volumes exploded off their holiday base-line on the order of 250-300% (30d ave) despite the UK remaining closed, while the US IG primary market also saw a flurry of 7 offerings, mostly focused in the 5-10y area for ~$9bn. The belly of the curve bore the initial brunt of hedging in the US pit-open selling wave, 2s5s10s >4bps cheaper by 11am, though the curve pivoted steeper throughout the afternoon, eventually seeing bonds +11bps cheaper and over the vaunted 2.00% mark. While the prospect of a new 30y BTP syndication also provided some conversation fodder early-on for curve bear-steepening in sympathy to Germany (30y +5.5bps), the staying power of the US long-end selloff suggested a bit more ‘new risk’ at play … while our 1.31% MAJOR support in 5y yields gave way amid the belly cheapening…opening up a technical target of 1.495% in the near-term (DEC 2019 range-low). In the long-end, bonds are also now trading back up to critical pre-Omicron support at 2.02-2.03% (a barrier to selloffs since July). Flow-wise, while cash flows were hard to source, there was plenty of chatter over ‘stand out’ downside buying in TY downside (~70k 127-00 puts bought w/ premium paid in the ~16.5mn region).
Insert THIS LINK when you hear/read about buying in TY downside and as far as the other guy writing 2x daily, this afternoons note title, 50 bp and the Terminal Rate offers this breakdown of selling activity
…One key aspect of Monday’s price action was that the bulk of the move in nominal yields was also reflected in reals; indicating the shift was more about an improving growth outlook rather than higher inflation concerns. Given that the Fed is poised to commence hiking this year, it follows that higher breakevens will become incrementally more difficult to achieve as any acceleration in the real economy not only cements the argument for higher outright yields, but it simultaneously increases the probability the Fed hikes sooner rather than later. The market is functioning on the assumption that the base case will be 25 bp hikes delivered at a quarterly cadence. As a departure point; surely both investors and the Fed are onboard with this baseline. What happens in the event the Committee finds cause to increase the pace? 25 bp per meeting would certainly be on the table …
It was also noted that volumes were quite elevated,
… Volumes were at elevated levels on Monday with cash trading at 155% of the 10-day moving average as 2022 got underway …
Giving somewhat MORE credibility TO the upwards shift (not yet break) in rates. With this volume backing the move, a final comment (and visual) on POSITIONS,
… We were struck by the latest CFTC data and what it revealed in terms of positional alignment into the end of the year as books were closed or positions were taken ahead of Q1. Specifically, TU contract positioning that has reached its longest since 2016 when 2s were in the process of trading in a 50 bp to 100 bp range in between liftoff in December 2015, and the second rate hike of the cycle that followed one year later. As 2-year yields reached > 80 bp for the first time since March 2020 on Monday, we’re left to consider whether the cheapening in short coupons has reached a threshold where dip buying interest may begin to emerge. Looking further out the curve, TY net positioning reached its shortest since early 2020 as the collective expectation that higher yields will define 2022 flowed through to some willingness to press the unquestionably crowded trade. We’re certainly sympathetic to some of the nuances and caveats surrounding this particular series, but as the positional departure point for the new year takes clearer shape, this dynamic offers useful context if nothing else.
What Tokyo does with this move HIGHER (up to / near ‘support’) will be interesting and perhaps a story told by tomorrows, while we slept, edition. ‘Til then …