(USTs mixed, curve steeper on light volumes) while WE slept; a lonely bond BEAR; technical reasons to LIKE bonds; technicals bullish stocks, too (coincidence?)
Good morning … overnight (via Bond Money), China Inflation saw a fall in PPI, down 1.3% yoy, and CPI rose at its slowest pace in eight months, climbing 1.6% yoy in line with f/cs…The ECB warns proposed rules to smooth natural gas price spikes could jeopardise financial stability.
… here is a snapshot OF USTs as of 7a:
… HEREis what another shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are mixed and the curve has pivoted steeper around a little-changed TY point overnight. In our chart attachments today we look at the set-ups for long-end duration and select curves too. DXY is little changed this morning while front WTI futures are modestly higher (+0.5%). Asian stocks were mostly higher (Hang Seng up another 2.32%), EU and UK share markets are all modestly higher while ES futures are showing +0.3% here at 6:40am. Our overnight Treasury flows saw Treasuries led higher by Aussie bonds (Aussie 10's -7bp) with better real$ buying from intermediates out to the long-end seen amid weak volumes (~60% of ave). In London's AM hours, our Treasury flows were mixed with fast$ continuing to add steepeners. Asset managers and financial names bought intermediates while CB's came back as front-end buyers after yesterday's record through-bids for front end (1mo and 2mo) T-Bill auctions. Overnight Treasury volume through 6:40am was ~70% of average overall with 2's (45%) seeing the lowest average turnover in memory…
…Tsy 2s5s10s 'fly, daily: Last month this 'fly completed a measured move extension lower, and then over-shot it a bit earlier this month. But over the past 3 weeks this 'fly appears to have built a near-term base (rounding bottom) and now daily momentum guides higher. Next upside resistance is near the -20bp level with not much resistance between here and there. Would therefore guess cheaper for the belly over the coming week or more.
… and for some MORE of the news you can use » IGMs Press Picks for today (9 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Now as far as a few items from Global Wall Street which I think you’ll find funtertaining … Let me begin with Bloomberg’s Weekly FIX detailing …
Everyone is bullish on bonds. KKR is bullish, Morgan Stanley is bullish, Pimco is bullish — the list goes on. And then there’s Wells Fargo.
Yields on 10-year Treasuries should soar to between 4.25% and 4.75% through early 2023, in the eyes of Wells Fargo macro strategist Erik Nelson. The logic is that for the Federal Reserve to successfully drag inflation lower, so-called real yields need to rise — meaning nominal rates need to move dramatically higher as well.
“The Fed’s going to have to keep policy uncomfortably tight for an extended period, and to us, that means there’s still a lot more room for upside,” Nelson said in a Bloomberg Television interview with Jonathan Ferro. “It’s very possible that the Fed does cut rates, maybe not necessarily next year, but in 2024 and beyond, but the odds that they cut rates back to zero is very low. So the floor for rates, let’s say three, four, five years out, is much higher than it would have been in past cycles.”
To illustrate the point, Nelson brought us back to 2018. Yields on the 10-year were about two dozen basis points lower against a profoundly different macro backdrop. Now, central banks globally are hiking rates aggressively and whittling down their balance sheets, and inflation compensation is simply too low. Add that together, and 4% will be more of a floor than ceiling for benchmark yields in the new year, Nelson said.
Given that 10-year Treasuries are currently yielding about 3.5%, there’s a lot of daylight between here and 4.75%. And with everyone up and down Wall Street warning that the Fed is going to hike the US into a recession, the long end of the Treasury curve has been seeing a lot of love lately.
But if Nelson’s vision of the world bears out — structurally higher inflation means structurally higher policy rates — maybe 125 basis points of additional yield isn’t too much to ask for.
Ever Heard of This One? There’s plenty of anxiety over the traditional yield curves right now, but here’s another spread to worry about: the 10-year Treasury yield versus the effective Fed funds rate.
A monster bond rally over the past seven weeks has dragged 10-year yields about 30 basis points below the effective Fed funds rate, which currently stands at about 3.8%. While admittedly, that sounds like a needlessly esoteric spread to watch, it has an interesting history.
Since the early 2000s, that spread has only had three other meaningful episodes of inversion. In each instance, the dynamic flipped when the Fed had reached the terminal rate of past hiking campaigns. The significance there is that investors are pricing in an economic slowdown as the next step in the cycle, according to BMO Capital Markets.
But unlike 2001, 2007, and most recently, 2019, we know that the Fed is nowhere near its end destination. Even the more conservative forecasts for the central bank’s next steps involve a full percentage point of additional rate hikes, including a 50 basis point move next week, which will further invert the spread.
It’s important to keep in mind that the inversion of the funds-10s spread isn’t a binary event, BMO’s Ian Lyngen said. The degree to which effective Fed funds fall below 10-year yields matters for the read-through.
“When we get the widely anticipated 50 basis point rate hike on the 14th of December, that will have entirely different implications given the depths of that inversion and what that implies for the disconnect between what the Fed is attempting to achieve and what market participants fear,” BMO rates strategist Lyngen said on the firm’s Macro Horizons podcast…
Next up on MY list would then be THISfrom UBSs Paul Donovan ahead of PPI
China’s producer price inflation was negative in November, and the consumer price inflation rate slowed. China’s inflation data is published in year-over-year terms, which says as much about last year’s price level as it does about this year’s price level. The inflation numbers are rather parochial, with little global relevance.
US November producer price inflation data is more globally important. Last November, inflation was rising, now disinflation forces are strong. Consumer durable goods price inflation has been in a very sharp decline—the 2021 inflation (focused on durable goods) is clearly ending, but has been replaced by different forms of inflation in 2022…
Ok then … lets see where we are THIS November. And after today’s PPI and where we are here / now, thinking a bit about the future — DB continues thinking about 2023 and USTs
Treasuries head into 2023 with the most attractive yields in years, offering investors a good income opportunity and bigger cushion against further rate increases. After two consecutive years of declines, total market return should register in the low- to mid-single digit next year.
Yet, certain groups of investors may demand fewer Treasuries next year, owing to factors ranging from tight Fed policy to an unwind of Covid dynamics. At the same time, the Treasury's privately-held borrowing is expected to remain substantial in part because of QT, although we expect an increased share of the issuance to shift into bills.
The debt ceiling will likely constrain the Treasury's borrowing capacity and cash balance in 2023, placing a soft cap on bill supply until Congress can reach a resolution. We forecast $500bn of bill supply and bill's share of the total debt to rise to 17% by year-end.
With less active demand from traditional buyers of Treasuries, hedge funds and leveraged investors may end up filling the gap. Increased activities from price-sensitive players augur higher volatility and wider funding spreads…
For MORE on the year ahead and the YIELD CURVE, see HEREfor, “2023 US Rates Outlook: recession yields a steeper curve”
THIS NEXT ONEstruck me as interesting as TODAY, anyways, it would appear this shope is on the other side of WFC (noted and lonely bond bear above)
While everyone focuses on the S&P 500 finding resistance at its 200-day moving average, bonds are posting their most substantial rally since the early 2020 peak.
Treasuries have represented downside risk for almost two years. We get it. Nobody’s wanted bonds!
The long-term Treasury bond ETF $TLT has gained almost 20% since late October. In the process, it registered its largest four-week rate of change in a decade (aside from the covid related volatility).
This is what a momentum thrust looks like:
Notice the previous rallies in mid-2021 and earlier this summer (highlighted in yellow).
Both advances failed to produce sustained strength. It not only shows in price but also in the lackluster momentum readings that followed (highlighted yellow in the lower pane).
The bond rally today paints a different picture – one of strength…
… Relative Strength
“Bonds” and “relative strength” in the same sentence… Oh, stop it!
It might sound crazy, as it goes against our recency bias. But, lucky for us, we have the charts.
Check out the bonds versus stocks ratio TLT/SPY:
Treasuries are outperforming stocks in the near term, reclaiming a shelf of former lows going back to April.
Jitters about a consumer-led recession over the past few days pushed the CBOE equities Put/Call Ratio up to 1.46 yesterday (chart). That's a very elevated reading and suggests that there is too much pessimism. It favors a yearend rally rather than a yearend crash.
Dont forget what was noted HERE yesterday … RATES may be flashing some bullish signals, too (KIMBLE: Are Interest Rates Creating Giant Reversal Pattern?) and so, Yardeni’s ‘call’ may be more pedestrian than he and his YEARS of credibility might lead us to believe … as Kimble noted and I believe to REMAIN a truth,
… Higher interest rates have rattled the financial markets hard so a reversal lower is welcome news for consumers and stock market bulls.
Not much earth shattering THERE… have a great start to the end of the week. Hopefully will have some time to put out a note / thoughts over the weekend but … THAT is all for now. Off to the day job…
