Momentum setup appears to be overBOUGHT so lower rates today somewhat counter intuitive at least as far as concession for supply goes … Perhaps there is something in here as far as covering of a bet ahead of tomorrows CPI? Perhaps bond jockeys simply having nothing else better to do … they certainly did help with yesterday’s 3yr auction, a good (“blowout'“) 3yr auction wasn’t enough to save the (FI)day yesterday and I’m not sure today’s 10y or tomorrows 30y all just before CPI will help.
ZH: Blowout 3Y Treasury Auction Shows Record Demand For First Coupon Sale Of 2023, No CPI Jitters
… here is a snapshot OF USTs as of 705a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are higher and the curve flatter this morning as UK Gilts and EU peripheral debt markets (BTP 10's 8bp tighter to Germany) led the overnight bounce-back. DXY is UNCHD while front WTI futures are modestly higher (+0.4%). Asian stocks were mixed, EU and UK share markets are all higher (SX5E +1%) while ES futures are showing +0.2% here at 7:10am. Our overnight US rates flows saw a bid emerge in Asian hours with good buying of the long-end from Asian real$ names. Japan's 30y auction helped matters, coming better subscribed than expected. In London hours our desk noted a welcome pick-up in activity with long-end buying out of Asia spilling into their time zone too. Overnight Treasury volume was decent at ~125% of average with 10's (162%) and 30's (126%) seeing the highest relative average turnover overnight, matching our desk activity.
… Our first attachment this morning was borrowed from the presentation by the fixed income investor who is linked in above. It's the simple overlay of the Treasury 2yr yield and the Fed Funds target rate (upper bound) showing that macro trends in 2's typically reverse well before Fed policy does.
… and for some MORE of the news you can use » IGMs Press Picks for today (11 JAN) to help weed thru the noise (some of which can be found over here at Finviz).
Global Wall Street SAYS … there are CONTINUED signs of moderating demand,
… Consumer durable goods prices caused the 2021 transitory inflation, when US consumers discovered that without a 102-inch television in every room of their home, life was not worth living. As that surge in demand faded, consumer durable goods prices have experienced dramatic disinflation. The delivery company FedEx announced it is scaling back Sunday deliveries “to better align… with current consumer demand.” Translating US corporate babble into King’s English, this suggests demand for goods continues to soften.
Global Wall Street ALSO suggesting and attempting to prove WHY it’s different this time,
• Recession foretold in developed markets (DM), a pause in central bank rate hikes and China’s reopening help shape 2023 and reinforce our tactical views.
• European equities led DM stocks higher. Surprisingly weak U.S. services data spurred bets for Federal Reserve rate cuts this year, which we think are unlikely.
• We see the U.S. CPI slowing as spending shifts back to services from goods, but wage growth will keep core inflation higher than before the pandemic.
… Investment themes
… 2 Rethinking bonds
• Fixed income finally offers “income” after yields surged globally. This has boosted the allure of bonds after investors were starved for yield for years. We take a granular investment approach to capitalize on this, rather than taking broad, aggregate exposures.
• The case for investment-grade credit has brightened, in our view. We think it can hold up in a recession, with companies having fortified their balance sheets by refinancing debt at lower yields. Agency mortgage-backed securities can also play a diversified income role. Short-term government debt also looks attractive at current yields.
• In the old playbook, long-term government bonds would be part of the package as they historically have shielded portfolios from recession. Not this time, we think. The negative correlation between stock and bond returns has already flipped, meaning they can both go down at the same time. Why? Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets. If anything, policy rates may stay higher for longer than the market is expecting. Investors also will increasingly ask for more compensation to hold long-term government bonds – or term premium – amid high debt levels, rising supply and higher inflation.
• Investment implication: We prefer investment-grade credit over long-term government bonds…
Specifically on GOVERNMENT BONDS, BLK continues,
… The underweight in our strategic view on government bonds reflects a big spread: max underweight nominal, max overweight inflation-linked and an underweight on Chinese bonds. We think markets are underappreciating the persistence of high inflation and the implications for investors demanding a higher term premium. Tactically, we are underweight longdated DM government bonds as we see term premium driving yields higher, yet we are neutral short-dated government bonds as we see a likely peak in pricing of policy rates. The high yields offer relatively attractive income opportunities.
Sticking with the theme of why / how it is different this time,
LPL: Is The Yield Curve Recession Signal A False Positive?
Last November we noted that the shape of the U.S. Treasury yield curve is often looked at as a barometer for U.S. economic growth. Moreover, we noted that the spread between the 3-month T-Bill yield and the 10-year Treasury yield (3M/10Y) has been a fairly reliable recession signal, having correctly predicted essentially every U.S. recession since 1950, with only one “false” signal, which preceded the credit crunch and slowdown in production in 1967. Recently, however, the finance professor that pioneered the use of the yield curve as a recession signal has cautioned that this time may in fact be different—something we have noted in prior missives as well.
Complicating the signal this time around is twofold: the Federal Reserve (Fed) is in the midst of one of its most aggressive rate hiking campaigns in history and interest rates are still at fairly low levels (thus the starting spread between the two tenors was fairly tight)…
… while we aren’t ignoring the signal completely we think the level of yield curve inversion is perhaps steeper/deeper than actual economic conditions may warrant. We think the odds are roughly a coin toss that the U.S. economy falls into a recession in 2023 but it is no sure thing. The consumer is still spending and with businesses still hiring at an elevated clip, there is a chance that we can skirt by with an economic slowdown and not an outright contraction—although if the economy does contract, we think it will be a shallow contraction due to the aforementioned reasons. It’s also important to point out that the last time the 3M/10Y yield curve was inverted, the economy fell into a recession because of a global pandemic—something we would argue was not priced into the inversion yet it still gets “credit” for the signal. Economic models help simplify a complex world but it’s important to remember that the signal isn’t always accurate and sometimes things, are in fact, different.
As themes from Global Wall Streets inbox have settled, now the press picks them up and specifically how ROW > usa (at least as far as equity preferences goes — see HERE and HERE) … This mornings column by John Authers of Bloomberg
… When the dollar is weakening like this, investors in non-US assets benefit from a double whammy, as the shift in the currency should on its own ensure some uplift. Comparing the US to FTSE’s index of the rest of the world, we see both that the trend for US outperformance has been remarkably strong and persistent ever since the global financial crisis — and that remarkably this is the biggest reversal of US dominance since 2010:
But is it safe to assume that the dollar will keep weakening like this? Its fall over the last three months has been driven largely by falling Treasury yields, as investors bet on a Fed “pivot” toward cutting rates. That makes the US a less attractive destination for capital flows. That bond rally continues, despite the Fed’s refusal to do anything to encourage the belief in an imminent pivot. Jeff Gundlach, chief investment officer of DoubleLine Capital LP and one of the most followed experts on fixed income, attracted headlines Tuesday with his assertion: “My 40-plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says.” If this is right, it seems a fair bet that dollar weakness will continue — and it’s notable that the 10-year Treasury yield remains barely above the 3.5% level it first reached in June, and far below its October peak of 4.33%. But it’s worth listening to the Fed as well as Gundlach, and Jerome Powell’s speech Tuesday contained no hint of a pivot.
And from the intertubes, where Bespoke notes,
… “The yields on short-term Treasuries have been offering up some important tells recently. Below we highlight the yields on 6-month, 12-month, and 2-year Treasuries over the last 12 months. After trading with a positively sloped curve (the longer the duration, the higher the yield) through the first half of 2022, the yields on all three began to converge in late July/early August. In November, the 2-year yield started to drift lower, while yields on the 6-month and 12-month held firm. And just in the last week or so, we've seen the yield on the 12-month start to drift lower as well, while the yield on the 6-month has ticked slightly higher. As things stand now, the 2-year yield is at 4.18%, the 12-month is at 4.66%, and the 6-month is at 4.82%. This means the 2-year is inverted with the 6-month by 64 basis points, while the 12-month is now inverted with the 6-month by 16 basis points.
Yields on these three Treasuries are telling investors (and the Fed) where "the market" expects the Fed Funds Rate to be over the duration of the maturities. Right now the market expects rates to peak at some point in mid-2023 before ultimately pulling back. The fact that no points on the Treasury curve are currently above 5% tells you what the market thinks about the Fed's unanimous support of getting the Fed Funds Rate above 5% and holding it there. It's not buying it. While "the market" sees inflationary indicators falling pretty much everywhere it looks, Fedspeak has so far been unwilling to acknowledge any meaningful progress. The more inverted we see longer duration yields become with the 6-month T-Bill, the more damage the hawkish Fedspeak will become.
Interesting, for sure. For MORE from the web and specifically what is on the minds of THE bond king,
… Gundlach wastes no time to slam 2022 as a miserable year, which he says was the worst year of his career in terms of benchmark returns for fixed income, and then proceeds to immediately lay in to the Fed, saying that the bond market signals - correctly - that there is no way the Fed will hike to its target above 5%...
... and instead it is the bond market that is in control and always has been: quite simply, "The Fed follows the 2Y Treasury."
I’d read the ZH note or track down replay and listen in as Gundlach details how and why Fed will restart QE, monetizing not only the debt but the interest on the debt too.
Finally, from Ed BOND VIGILANTE Yardeni, recapping what was already noted HERE yesterday,
Yardeni: Small Business Owners Say Job Market Cooling
December's NFIB survey of small business owners should make the Fed's hawks a bit less hawkish. They want to see evidence that the labor market is cooling and that inflationary pressures are easing. Today's NFIB report confirmed that both may be underway…
A few items to keep in mind as you wait for this afternoons 10yy auction, tomorrow mornings CPI and tomorrow afternoons 30yr auction … I’m certain JPOW & Co will be watching all of this too as well as,
Investing.com: Stocks Get Off To Strong Start In 2023 On Fed Pivot Hopes!
