(USTs are lower and curve is flatter on avg volumes) while WE slept; UST liquid NOT bad (they say); a PAUSE is coming (Prof. Siegel); raisin' the roof (BAML SPX target); #Got2s?
Good morning … Ahead of this mornings 2yr auction (and the weeks SUPPLY)
Not sure what to make of recent trading range (5.08 - 3.57) other than to note we’re just north of the MIDDLE (4.32%) and so, go ahead and make something of it like, “…we sense that we haven't seen the last of 3.99% prints in 2yrs yet, lol.”
#Got2s? 2yy have RISEN ~35bps since last auction and so … Get those bids in early and often? Never mind … here is a snapshot OF USTs as of 706a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are lower and the curve is flatter this morning ahead of a Tsy 2y auction and with just one rate cut priced-in for the end of 2023 after 4-5 cuts were briefly priced-in ~mid-March. DXY is higher (+0.4%) while front WTI futures are little changed. Asian stocks saw weakness in China (SHCOMP -1.5%) but a mixed performance elsewhere, EU and UK share markets are mixed-lower while ES futures are showing -0.1% here at 6:30am. Our overnight US rates flows saw prices leak lower during Asian hours with limited flow throughout their hours. Our London colleagues saw paying in the belly as well as on-balance selling in the long-end amid EU supply this morning. Overnight Treasury volume was about average overnight.…Today marks the 8th straight session where Treasury 2yrs have sold off and this morning's first attachment shows how 2yr yields are nearing 4.40% support- a reactive high during March's regional banking ructions. Above that 4.40% support and support levels are harder to source save for the two open gaps left behind in mid-March. You can also see in the lower panel that short-term momentum is getting increasingly 'oversold;' a hint that tactical positioning may be increasingly one-way and short the front-end. But as the late February and early March sell-off showed, it's best to wait for a confirmed bull turn in momentum before getting excited about a potential rebound in 2yr Tsy prices. So we're basically on watch to see how things unfold after the recent, multi-month range breakouts in Treasury 2yrs out to 30yrs.
A brace of other US rates benchmarks are nearing range extremes and they will be the focus of this morning's remaining attachments. Treasury 30yr yields are now just spitting distance from their ~6mo range support near 3.985%-4%, as we show next. Daily momentum (lower panel) is also back to the 'oversold' readings seen at the last two tests and rejections of this support band-- though the local trend remains clearly bearish still. So a possibly key intersection for 30yrs here.
… and for some MORE of the news you can use » IGMs Press Picks for today (23 MAY) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some of THE VIEWS you might be able to use… here’s what Global Wall St is sayin’ …
This first item one which contains a chart worth emphasizing as we continue to focus on debt ceiling drama …
Barcap: Global Portfolio Manager’s Digest - Holding Pattern
Treasury Market Liquidity. Amid worsening Treasury market liquidity, we present a fundamental framework to gauge liquidity. Our work shows that liquidity is not unusually poor given its fundamental drivers; if anything, it has held up better than expected. Moreover, volatility itself has not been exacerbated by poor liquidity, negating a potential vicious cycle (page 4).
With this in mind, a couple charts from Dr. Ed Yardeni who asks,
Two of our favorite technical indicators for the 10-year Treasury bond yield are currently bullish. The yield tends to be highly correlated with the ratio of the nearby futures prices of copper to gold (chart). The ratio suggests that the yield, which is currently 3.70%, should be much closer to 2.00%. We view the ratio as a risk-on versus a risk-off indicator.
The Citigroup Economic Surprise Index (CESI) is highly correlated with the 13-week change in the 10-year yield (chart). The CESI fell from a recent peak of 61.3 on March 28 to 5.5 on May 19.
Notwithstanding these bond yield relationships, the yield has risen from a recent low of 3.31% on April 6 to 3.71% on Monday. Over this same period, the 2-year Treasury yield has risen from 3.83% to 4.33%. That’s mostly attributable to better-than-expected March and April employment reports. In addition, a few Fed officials have opined that the Fed should continue to raise the federal funds rate or follow any pause in the rate-hiking with further hikes if necessary…
The rest, as they say, is … behind the paywall! And turning from a doctor TO an ivory tower economist with lots of views,
Prof. Siegel: Is a Pause in Rate Hikes Coming?
Market activity last week seemed to hinge on the prospects of debt ceiling talks getting resolved and my sense was short sellers did not want to be caught short in a positive spike higher on headlines of a resolution of the stalemate. There certainly are other issues for the market beyond Washington politics, but the debt-ceiling saga remains top of mind and short sellers are looking for better re-entry spots. Readers of this commentary know my long-stated opinion: there is zero chance the debt issue will not get resolved even though there will be posturing and debate right up to the last minute before timelines are extended or the debt limit is raised.
Jerome Powell spoke with Ben Bernanke on Friday and there were a couple of interesting soundbites. Powell again emphasized job vacancies and demand for labor—so we will have to watch the JOLTS jobs data closely coming out next week. But Powell also talked about the tightness in policy coming from the bank lending issues—it sounded very much like he was leaning towards a pause in the hiking cycle. Based on the flurry and breadth of comments coming from Fed officials, I can see this next meeting in June being the first time with an official dissent whether the decision is a hike or a pause. I’ll emphasize again: the job prints are the key metric to watch at the moment to guide Fed action. Other inflation sensitive indicators like commodity prices have long since rolled over. If we get a hot jobs report and the JOLTS jobs openings report shows tightness, the hawks will have ammunition to keep tightening (wrongly in my view).
The 10-year bond yield has crept higher—and surprisingly the tech stocks remain resilient—while last year they were falling on higher interest rates. These tech companies are now viewed by many investors as defensive going into a recession and artificial intelligence (AI) excitement is further driving their prices higher.
… The real important data will be the monthly jobs report and the JOLTS data next week. I believe there will be a pause in rate hikes, but a hot jobs report next week could challenge that thesis.
AND for every bond jockey’s inner stock jockey, a price target UPDATED
BAML S&P 500 Target Update - New year-end target: 4300, range 3900 to 4600
Glass half-full view: the bull case for stocks
The era of easy money is behind us, but that might be a good thing. over the past few decades we have enjoyed financially engineered growth: cheap financing, buybacks and cost cutting. Today, Corporate America has shifted focus to structural benefits – efficiency/automation/AI and have bought themselves time to adapt via long-dated fixed rate debt. Old economy cyclicals, capital-starved since 2008, have become disciplined and self-sufficient, evidenced by lower betas and more stable earnings.
Finally, via Goldilocks, a visual history of the US debt limit
With the “early June” deadline by which the US Treasury estimates it could run out of money to pay its bills if the US debt limit isn’t raised fast approaching and markets seemingly at the whim of every debt limit-related headline, US debt limit dynamics are Top of Mind. We dig into the history and mechanics of the US debt limit, how negotiations around raising it could evolve, and the potential economic and market implications if they fail. GS GIR’s Alec Phillips has long maintained that raising the debt limit before the deadline is the most likely scenario, but places 10% odds on the deadline being missed, which could have severe economic consequences. But even if the limit is raised in time (as Phillips ultimately expects), we speak with David Beers, S&P’s former head of sovereign credit ratings who oversaw its 2011 US credit rating downgrade, and GWU’s Stephen Kaplan to explore whether the repeated brinkmanship around raising the debt limit could in and of itself undermine the value proposition of US assets…
… THAT is all for now. Off to the day job…