(USTs mixed / higher despite GILT selloff on light volumes)while WE slept; foreigners bought 2s, will they buy 5s? 'history of the FFs/2s spread w/core inflation'
Good morning … build it (concession) and they came,
ZH: Stellar 2Y Auction Sees 2nd Highest Indirects On Record
… The internals were even more impressive, because with an award of 68.2%, Indirect bidders, aka foreign buyers, saw the second highest takedown on record, with just the 68.7% in June 2009 higher.
As good as this 2yr auction might very well have been,
… Those issues surrounding the debt ceiling have put serious pressure on US Treasuries over recent days. At the front end, yesterday a Treasury auction of a 21-day cash management T-bill yielded 6.2%, which is above what last week’s 4W bill received (5.84%). The bill is due June 15 and would fully capture Treasury Secretary Yellen’s projected x-date period of “early-June”, furthermore there is an expected influx of corporate tax revenue around that date and so the risk of default remains very much prior to that point. That said there is typically lower demand for the cash management bills than benchmark issues but the fact remains that we have not seen a 6-handle on US Treasury security since 2000 when 2, 10 and 30yrs traded at that level.
In terms of other benchmarks, the 1M and 3M US T-bills were flat after a late rally with the latter rising marginally (+0.2bps) to a fresh post-2001 high of 5.226% - eclipsing last Thursday’s close. And when it came to longer maturities, rising 10yrTreasury yields ran out of steam after having risen for 7 consecutive session as they fell back -2.3bp, taking them to 3.692%. They did hit 3.75% earlier in the session but risk-off seemed to provide a bid after Europe went home. Overnight, they are -1.2bps lower at 3.68% as I type….
Question then is … will they BUY 5yy?
I’ve yet to redraw the TLINE which is currently ‘in play’ and as 5yy garners a bit of a bid I’d also note momentum (stochastics, bottom panel) appear to have crossed and bullishly so, and from overSOLD levels, indicative of lower yields — or a consolidation — just ahead).
That in mind … here is a snapshot OF USTs as of 705a:
… HEREis what this shop says be behind the price action overnight…
… WHILE YOU SLEPT Treasuries are mixed/higher despite a heavy sell-off in Gilts (UK CPI not as weak as expected). Germany's IFO disappointed and New Zealand hiked 25bp but hinted that today's hike as the last tightening of their cycle. DXY is higher (+0.25%) while front WTI futures are higher (+1.5%). Asian stocks were lower, EU and UK share markets are notably lower (SX5E -1.8%) while ES futures are showing -0.35% here at 6:55am. Our overnight US rates flows saw a firm trade in Treasuries during Asian hours with better real$ buying in intermediates noted. During London hours some early back-end buying was noted alongside some later front-end selling from fast$ names. Overnight Treasury volume was ~90% of average with futures showing higher average turnover than cash this morning.
… this tape watcher thought that they saw/felt the first hints that higher nominal and real rates were beginning to dampen the recent enthusiasm for stocks yesterday as 30yr real yields (shown next) pressed up against their 2023 range highs. Portfolio balance channel logic would dictate that at some point... higher real and nominal rates would/will lure AUM out of risk assets and yesterday hinted at such flow to us. Do note in the lower panel of the 30yr real rate chart that daily momentum is flipping bullishly this morning from 'oversold' levels...
Additionally, our next attachment is a related one showing the S&P dividend yield - 3mo T-Bill yield relationship. At least by this measure, S&P's are looking increasingly like 'imperfect substitutes' compared to front-end safe-haven rates...
… and for some MORE of the news you can use » IGMs Press Picks for today (24 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’ … First up, how about that data …
April new home sales rose 4.1% m/m to 683k, alongside a 27k downward revision to the prior month. The median price for a home declined alongside a drop in the months' supply to 7.6 months.
… Interestingly, new home sales showed an increase despite mortgage rates rising throughout April. This is intriguing due to the method by which new home sales are measured. They are measured at the time of contract signing and, as such, reflect a more-current picture of mortgage rates than existing home sales, which are measured at time of closing. The level of sales today, despite surprising to the upside, is only a movement back towards the prepandemic trend. With mortgage rates remaining over 6%, this will continue to put pressure on demand by pushing some consumers out of the market.
HOUSING … a victim of it’s own success,
ZH: New Home Sales Unexpectedly Surged In April As Builders Slashed Prices
…. As CNBC noted "it's all about incentives." as prices were slashed: Median new home price fell 8.2% y/y to $420,800; average selling price at $501,000
Will this please Powell?
Perhaps disinflationary nature of price cuts if they prove to offset rate INCREASES and so, higher mortgage rates and ultimately LOWER affordability, will in fact be pleasing. What may be NOT so pleasing is rates ratcheting higher … on the one hand, a concession being built (and so, they — buyers — will hopefully come) but on the other hand, rates continuing higher, well, will offset any ‘good’ offered by disinflating house prices?
Bloomberg (via ZH): 10-Year Yield Seeking Higher Ground On Technical Breakout By Akshay Chinchalkar, Bloomberg Markets Live reporter and strategist
The recent breakout in the US 10-year yield may have 4% within its sights.
The benchmark rate completed a seven-day rising streak through yesterday against the backdrop of negotiations around the debt ceiling. Although Monday’s talks proved inconclusive, both President Biden and House Speaker Kevin McCarthy expressed optimism about engaging in “productive” discussions that should eventually help reach an agreement and resolve the impasse.
So, where to now for yields? The streak itself is sending mixed signals, depending on where in history one looks for precedence. Between the period Jan. 1, 2001 to March 9, 2020 - the day of the Covid-crash lows - the seven-day rising streak was seen a total of 19 times. In 17 of those occurrences, the yield was down over the following 20 days for an average of 15 basis points — so a shot in the arm for bond bulls. But the period since then has seen five such streaks - excluding the current signal - with yields rising an average of 42 basis points over the next 20 days, leaving bond optimists with a 100% loss record. With Treasury Secretary Yellen’s X date of June 1 rapidly approaching, history doesn’t seem to be helping much with what comes next.
Last week’s breakout on the point-and-figure chart leaves no doubt though. The most recent slide in the 10-year yield bottomed out at a significant support area with the subsequent rally breaking above a pivotal upside barrier, a classic case of support holding and resistance giving way. Notice also that the decline from the October peak of 4.33% didn’t break below the long-term, rising 45-degree support line drawn off the November 2020, double-bottom lows. That turns the tactical focus on the next important hurdle at 3.90% - 4.00%.
Point and figure analysis is a charting method which highlights the direction of prices - up in a column of Xs and down in a column of Os - without a time dimension. It does so by using two parameters - the box size and the reversal size. The box size is the minimum move that must occur for the current column to increase in length, while the reversal size defines the size of an opposing move that must occur for the column to change direction.
In our example that uses the US 10-year yield, the box size is set to 0.1% - the value of each X and O - and the reversal size is set to 3 boxes.
The current column has 4 Xs which means that yields have risen by 0.1% x 4 = 0.4% from the lowest O in the previous column. In doing so, they have broken above the level where three prior columns of Xs peaked out, thereby clearing resistance. Notice how support held when the immediately previous column of Os troughed at a level where past columns of Os had bottomed.
The upside breakout will be suspect if yields drop immediately to 3.40% or less from current levels. A print of 3.80%, on the other hand, will fortify the odds of yields going toward 4%. Federal Reserve Bank of St. Louis President James Bullard said Monday that two more rate hikes may be needed to bring inflation down to the central bank’s target of 2%. For now, that’s the path that the US 10-year seems to be latching onto.
I’ve never been a point and figure guy myself even when I had access TO a terminal. Speaking of CHARTS, a couple things for us visual learners … starting with this
… So far, this USD strength seems to have largely been driven by a renewed widening in US (real) rate differentials vs the ROW, on the back of a string of stronger than expected US data and hawkish Fed commentary.
This has also driven US 10yr Bond Yields above key short-term support at 3.63/64%, which is likely to drive a deeper short-term corrective move higher towards 3.92/93%. However, we still view the market as in a core downtrend, and maintain our core 2023 objective at 3.00%.
Given such focus on the front end — a most important chart AND one which dangerously close to negating a top, here are 2s in context of … FedFunds
Rates have done a partial U-turn since mid-March while the Fed has hiked another 50bp. The initial 130bp rally in 2Y UST yield in March and April has been partially reversed with a 60bp selloff in the last two weeks, with a similar pattern across the curve. Throughout that period, core inflation has remained practically unchanged. The most dramatic repricing in terms of curve shape has been in the FFs/2s spread, initially 178bp of compression, from +32bp to -146bp between 8-Mar and 4-May – and although we have seen a 60bp widening since then, this spread remains aberrant in the context of the general mechanics of Fed cycles.
The Figure illustrates the history of the FFs/2s spread overlaid with core inflation across different cycles since the mid-1980s. The current spread level is represented by the dashed red line. We highlight the tightening cycles with green rectangles. Except for the late 1970s, when 2s remained below Fed funds from the beginning of the cycle, until this year, negative FFs/2s had never occurred while the Fed was tightening. Typically, this spread begins to tighten as rate hikes commence, approaching zero towards the end of the tightening cycle. Only when the market is convinced that the Fed is done with tightening does the spread begin to enter negative territory as the belly begins to anticipate future rate cuts. The current negative values of FFs/2s emerged in the first days of this year when Fed funds were at 4%. Since then, the Fed has delivered 125bp of rate hikes while the spread has compressed by almost 150bp.
This shape of the curve suggests that there is still a considerable negative risk premium priced in by the belly and that expectations are consistent with near-term (6M-9M) rate cuts..
There’s a saying that ALL views are created equal but that is only in THEORY. In practice, we KNOW that some VIEWS are more equal than other and so,
Equities rallied to YTD highs on optimism around a US debt ceiling resolution, a move that seems misplaced given they were never pricing in a material risk of failure to raise the ceiling to begin with, and as negotiations are far from complete. Even aside from the debt ceiling issue, we maintain that the risk-reward for equities is poor given elevated risk of recession, stretched valuations, high rates and tightening liquidity, and we favor cash over equities at the former’s ~5% yields. A divergence remains between rates markets that expect the Fed to cut this year, equity markets that interpret those potential cuts as positive for risk, and the Fed’s more hawkish rhetoric. This gap is likely to close at the expense of equities, as rate cuts will likely only transpire from a risk off event, and if rates stay higher they should weigh on equity multiples and economic activity.
This month we raise the cash allocation in our model portfolio by 2%, funded by reducing our weighting to equities and corporate bonds by one percentage point each. Within commodities, we rotate from energy (given recession risks and a potentially fading China growth impulse), to gold following its recent sell-off (on its safe-haven demand and as a debt ceiling hedge).
… In the US, the market narrative has shifted from prospects of technical default to a deluge of T-bill supply, and we are tactically long 5Y USTs and keep 10s/30s steepeners…
… Long duration govt bonds vs. equities We retain a more defensive stance in our model portfolio via an UW in equities. As we note above, the risk of recession remains elevated as tight monetary policy bites, and once the debt ceiling is resolved the rebuilding of the Treasury’s General Account with the Fed looks set to present a significant drain on banking system liquidity. While the acute stage of the recent banking stress appears behind us risks to credit creation and further vulnerabilities could surface in coming months and quarters. In terms of the activity data, there have still been signs of resilience, though continued labor market tightness will likely continue to keep pressure on margins. By contrast, valuations have become more stretched, with the rally in risk assets post-SVB pushing equity multiples higher and unwinding much of the rise in credit spreads. With tightening through credit channels likely substituting for some monetary tightening, we continue to see the picture as supportive for duration over the medium term. Moreover, while we have previously preferred to hold duration exposure on a total duration basis via IG corporates, given the narrowing in spreads we turn more cautious and move the OW to government bonds
Completely off the beaten path tangent here...but was just thinking my LGBTQ-themed can of Bud Light will go quite well with my rainbow-colored Tuck Friendly bathing suit LOL!
Incredible Fixed Income Summary!!!!!!!!!!!!!!
Completely off the beaten path tangent here...but was just thinking my LGBTQ-themed can of Bud Light will go quite well with my rainbow-colored Tuck Friendly bathing suit LOL!