Good morning … 5% … we made it! Oh, wait, that’s prolly not a good thing. It is likely a byproduct of reversal of F2Q bid as it appears Israel has delayed (not yet cancelled) ground invasion of Gaza in effort to allow more time for hostage negotiations with terrorists…Bloomberg.com as of 542a
Bloomberg: US Push for Release of Hostages May Delay Israeli Ground War, But Won’t Stop It
Bloomberg: Ten-Year Treasury Yield Tops 5% for First Time Since 2007, Keeping Traders Wary
The 10-year Treasury yield crossed 5% for the first time in 16 years, propelled by expectations the Federal Reserve will maintain elevated interest rates and that the government will further boost bond sales to cover widening deficits.
The yield rose nine basis points to 5.01%, the highest since 2007. Fed Chair Jerome Powell suggested last week that central bankers are inclined to hold rates steady at their November meeting, but remain open to hiking again if a resilient economy fans inflation risks.
… The double-whammy of the Fed and Treasury has crushed the hopes of many that 2023 would prove to be the “year of the bond.” More recently, it’s proved powerful enough to offset haven flows into US debt as the Israel-Hamas conflict reignited geopolitical worries.
AND … moving on from 10yy AT / ABOVE 5% as we once again learn how it is PRICE can and will, from time to time, become the news … It is with that in mind, moving along from 10yy TO … stocks and WHY I’m looking at stocks, let alone all 500, is beyond me and quite OUT of my wheelhouse but …
Seems important and appropriate so, there you have it?
The BBG story has made it’s rounds and would argue for a more meaningful slowdown (helping Fed achieve ‘flation goals by … helping kill economic growth) and one might conclude this to be a very bullish outcome FOR USTs (ala HIMCO).
It should also be noted more research is needed to be done and I heard one aspect of such analysis noting a large portion of these subprime auto loans were made when they were PRIME and have since ‘slipped’.
I’d highly recommend a quick read of Randy Woodward’s TWEET HERE for somewhat more and in the meanwhile … I’ll be here wondering how // WHY it can be that Greek 10s are lower yielding than USGG10y <INDEX> GO (twitted — so it must be true — HERE)
AND … here is a snapshot OF USTs as of 705a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries have bear steepened (2s30s Tsy curve +3.7bp, see attachments) again (following similar bear steepening in Germany and the UK and Japan with 30yr Japan yields highest in a decade) overnight with 10yr Tsy yields hitting 5% just after 5am for the first time in 16 years. DXY is UNCHD while front WTI futures are lower (-0.8%). Asian stocks were lower, EU and UK share markets are all in the red (SX5E -0.4%) while ES futures are showing -0.55% here at 7:10am. Our overnight US rates flows saw Treasury yields get dragged higher by JGB's after a Nikkei article (linked above) suggested that the BOJ may tweak YCC in the upcoming meeting. Our cash flows were minimal (real$ a better seller in the front-end), hinting of futures-centric selling to set the tone. During London's AM hours our flows were mixed (early, light buying in the long-end then fast$ selling in the front-end as the belly cheapened). Overnight Treasury volume was ~85% of average overall.
…Treasury 10yrs, monthly: Long-term momentum 'oversold' but still guiding to higher rates (circled, lower panel) where next major support may be seen near 5.24%- a cluster of move highs seen in 2006/2007.
it’s a touch premature but does get one thinking AGAIN about bond market losses of an epic proportion, no?
And for some MORE of the news you can use » The Morning Hark - 23 Oct 2023 in effort to to help weed thru the noise (some of which can be found over here at Finviz).
Moving from some of the news to some of THE VIEWS you might be able to use… here’s SOME of what Global Wall St is sayin’ (in a similar sorta way you’ll find content if you pay for ZH PREMIUM … except different …)
… Notably, we raise our 10-year YE23 target from 4.20% to 4.75% and our 3Q24 target from 3.80% to 4.0% to reflect these dynamics. The forecast also assumes the belly richens further, resulting in a 2s/5s curve that remains somewhat inverted, but more broad curve steepening than we had previously expected…
Interestingly enough they do this AS they suggest they REMAIN LONG 5s … If yer not confused, yer just not payin’ attention? Have CAKE and eat it too — it’s a fan fav of Global Wall Street and so, with THAT (and all which was noted over the weekend HERE) in mind,
BNP - Sunday Tea with BNPP: Feeling TIPSy (NOW everyone seems to be coalescing ‘round TIPS … NOW?)
KEY MESSAGES
The Fed’s renewed focus on financial conditions increases our conviction in curve steepening. It also is making real yield exposure look more attractive relative to nominal.
In FX, we like being long CAD into this week’s Bank of Canada meeting. We also like owning EURUSD downside and FX vega to hedge rising geopolitical risks.
It will be a big earnings week for equities. To hedge the impact of higher rates, rising geopolitical risks and a potential disappointment in earnings, we like tight OTM SPX put spreads.
… I continue to be concerned as to how markets will cope with such high yields at the back end of markets, especially those in the US. We spent 10-15 years with yields and rates low/zero/negative across the DM world, helped by QE as this was seen as the only way we could finance the enormous global debt load. If this synopsis is correct, then surely one of the biggest 2-3 year yield sell-offs in history risks causing a lot of pain beyond any seen so far. If yields stay elevated, the only way I think I’ll be wrong is if we actually didn’t need those levels of rates and yields in the 2010s, or if central banks and governments have taken on enough of the risk just in time to avoid pain from higher yields. That argument is harder to buy in to with QT and strong government supply combining at the moment. On the risk of accidents it was interesting that the US Regional Bank index fell -3.53% on Friday and is down around -20% since the local peak in August and is less than 10% away from the crisis lows in Q2.
The gruelling sell-off in US Treasuries that began in the summer has continued this week, most notably in the longer end of the yield curve. The 10-year Treasury yield got within spitting distance of 5% on Thursday, a level not seen since 2007 and an increase of about 125bp since the July trough. Almost all of this move higher in the 10-year yield has occurred in real yields. A widely followed model of term premiums from the New York Fed shows that an expansion of term premiums fully accounts for the rise.
Explanations for the rise in long-end yields as well as the expansion of term premiums abound, ranging from technicals (e.g., a demand-supply imbalance in the Treasury market), to selling by momentum-based investors such as commodity trading advisors (CTAs), to fundamentals (fiscal sustainability concerns, stronger-than-expected growth). While these factors may have contributed to the rise in yields on the margin, Morgan Stanley macro strategists Matt Hornbach and Guneet Dhingra have argued that the Fed’s hawkish reaction function provides a fuller explanation. Two things stood out in the FOMC’s most recent dot-plot – another rate hike may be appropriate, and the higher policy rate would be in place for longer than previous dot-plots had suggested. In our view, the Treasury market has honed its reactions to incoming data on the hawkish reaction function that the FOMC communicated in its September meeting, subsequently reiterated by multiple Fed speakers.
We think the recent sell-off in Treasuries should be viewed against this backdrop…
… The rise in Treasury yields has further implications. The spike has contributed significantly to tighter financial conditions. As measured by the Morgan Stanley Financial Conditions Index (MSFCI), as of October 20 conditions have tightened by the equivalent of a little more than three 25bp hikes in the policy rate since the September FOMC meeting (Exhibit 1)…
… The subtle shift in the tone of Fedspeak over the past two weeks suggests a similar interpretation. In his remarks at Economic Club of New York on Thursday, Chair Powell said “Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening. We remain attentive to these developments because persistent changes in financial conditions can have implications for the path of monetary policy.” Other Fed officials have indicated waning appetite for an additional hike this year in the wake of tighter financial conditions while retaining the optionality for future hikes. They think the yield curve is doing the Fed’s job. This jives with our view that there will be no further rate hikes this year. While our conviction on a 4Q growth slowdown is strong, it will take time to be evident in the incoming data. Until then, hold on tight!
While there are plenty of events and fundamental data points worth considering, we find many remain fixated on the Fed's next move and S&P 500 price. These factors appear to be dictating narratives and positioning. On that score, last week brought further risks to the consensus 4Q rally view.
… In addition to the performance deterioration in interest rate sensitive sectors, the breadth of the market continues to exhibit notable weakness (Exhibit 6 and Exhibit 7). While some may interpret this as a bullish signal—i.e., oversold conditions, we believe it is a reflection of our long standing view that we remain in a late cycle backdrop where earnings fundamentals remain at risk. Further support for that view can be seen in earnings revision breadth which is now definitively breaking lower into negative territory and diverging from index price (Exhibit 8 and Exhibit 9) as well as the fact that, broadly speaking, stocks are trading poorly post 3Q results.
… On a positive note, the S&P 500 has finally reached the 200-day moving average with a small breach occurring around Friday's close. More interesting from a technical standpoint is the fact that we are seeing a positive divergence on this move lower in the RSI and other stochastics (MACD). We would not be surprised to see a further move lower in price this week below the early October lows before the next attempted rally. However, based on our views on earnings, valuations and policy (both monetary and fiscal), we believe the S&P 500 will have a hard time getting back above what were previously levels of support (i.e., 4300-4400) tactically. Instead, we think the index's price action into year end is more likely to mirror the average stock's performance rather than the average stock catching up to the market cap weighted index. Based on our fundamental and technical analysis, we remain comfortable with our 3900 year-end target (~17x ~$230 EPS).
MS- The Weekly Worldview: The Other Lever of Policy (Seth weighing in on move in YIELDS — aka ‘the other policy lever’)
The selloff in yields may slow rate hikes, but don't hold your breath on QT.
… But market functioning will always be a concern for the Fed, and disorderly moves or complete disruption of credit flows would definitely get their attention. The question for the Fed would be how systemic is any disruption and whether it appears likely to have too large a drag on the economy. That is to say, would it induce a recession rather than a slowdown. Through that lens, the rise in rates doesn’t really change the calculus for the Fed about stopping QT early. They want it to run its course, especially to shrink the RRP facility. If instead, the move in rates poses serious risk of the economy falling into recession, and the FOMC decides to substantially ease the stance of policy, then QT would also likely be called off.
UBS - A dangerously quiet day (calm before the ‘storm’)
There is almost nothing of note on the economic calendar—even ECB President Lagarde does not appear to be speaking. Eurozone October consumer confidence is due, but no investor is likely to change their portfolio on the back of such a number. This leaves markets prey to the whims and caprices of traders—or, worse, politicians.
The US House of Representatives still has no speaker. A British observer might suggest an institutionalized two-party structure is struggling to cope with representatives behaving as if in a three-party legislature. This is probably the last week markets will disregard the politics—after Halloween this ceases to be slapstick entertainment and starts to raise a risk premium around government shutdown.
The Federal Reserve’s Financial Stability Report was published on Friday, and is the second such report since the flurry of bank failures earlier this year. The challenge for regulators is that economic structural change creates new financial risks. New communication technology changes how bank runs form. New ways of working and consuming change the risks associated with assets like real estate.
Bond yields are likely to be a focus in the absence of fundamentals. US Treasury yields contain a risk premium for ( unnecessary) Federal Reserve policy uncertainty.
We expect that the Federal Open Market Committee (FOMC) will leave the target range for the federal funds rate unchanged at 5.25%-5.50% at the conclusion of its next meeting on November 1. Financial markets are essentially priced for no change as well.
Although the rate of real GDP growth in the U.S. economy remains strong, inflation is moving back toward the FOMC's target of 2%. That noted, we believe that the post-meeting statement will continue to characterize inflation as “elevated”, while also noting that recent geopolitical events add uncertainty to the outlook.
Recent comments by Fed officials suggest that most Committee members are comfortable leaving the stance of monetary policy unchanged at the upcoming meeting. That said, most policymakers indicated at the September FOMC meeting that they thought another 25 bps rate hike would be appropriate by the end of this year.
We believe the FOMC will want to keep its options open for further tightening. Therefore, we think the post-meeting statement will maintain the language that signals some additional policy tightening may be appropriate.
We do not expect the FOMC will make any changes to the pace at which it is allowing Treasury securities and mortgage-backed securities (MBS) to run off the Fed's balance sheet.
Yardeni- The Economic Week Ahead: October 23-27 (leads with a good quote for the ‘Hard-Landers’ … not quite the same ring as Transitorians but … you get the point)
This week should be another disappointing one for the hard-landers. That's been true all year and especially during Q3, when the economic surprises were mostly to the upside as shown by the Citigroup Economic Surprise Index (chart). Q3's real GDP (Thu) is tracking at 5.4% (saar) for the quarter according to the Atlanta Fed's GDPNow.
Like a Moth to Light...........Hedge Fund Bond Short trade going strong...
Hopefully top out near your 5.24 %
Thanks for all your efforts...
We made it boys!!! 5% !!!! Abenomics let us down but Bidenomics delivered ;)