(USTs 'mixed' with curve flattening on nearly average volumes)while WE slept; 10yy reFUNding insights; CPI skews; USTs bene debt ceiling chicken; 2yy in CONTEXT
Good morning … chances TODAYS edition of the reFUNding goes as well as yesterday’s rendition?
ZH: Blockbuster 3Y Auction Sees Record Indirects And Stop Through Amid Surge In Demand
I suppose the answer may be hinted at this morning at 830a with the CPI print but in the meanwhile, a look at tech setup of 10yy …
MY now far removed unprofessional (trading)view is of 10yy kissing ‘support’ (50dMA in this case) with momentum (stochastics) overSOLD — but not egregiously so. This momentum does appear to be on verge of a more BULLISH (ie lower yield) cross and so I’d think CPI + 10yy = resolution? Either we’re going to break below (3.46) or remain locked IN range (support up above 50dMA at 3.64%.
Before you get those bids in, Chicago style — early and often — here is a snapshot OF USTs as of 705a:
… HERE is what this shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are mixed with the curve pivoting flatter around a little-changed belly this morning with German bonds mildly outperforming. DXY is modestly higher (+0.10%) while front WTI futures are lower (-1.1%) after a build in crude oil stocks reported late yesterday (link above). Asian stocks were mostly lower, EU and UK share markets are mixed/lower while ES futures are showing -0.15% here at 7am. Our overnight US rates flows were unavailable this morning (that quiet??) with overnight Treasury volume showing ~95% of average.… The first shows the rapidly diminishing share of domestic banks reporting increased willingness to make consumer installment loans. Recession shading is included and the trend in the time series certainly reflects potential headwinds for the economy.
Banks’ (un)willingness to make consumer loans:
… and for some MORE of the news you can use » IGMs Press Picks for today (2 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’ …
Ahead of this afternoon’s reFUNding, a few words on 10yy from a large German operation,
Insight from Recent 10-Year Refunding Auctions
Ahead of tomorrow’s 10-year refunding auction, today’s chart showcases the relationship between auction tails and primary dealer takedown in recent 10-year auctions (differentiated between refunding and reopening auctions). All three of the strongest auctions since 2022 have been refunding auctions, stopping through by 3.1bps, 2.4bps, and 0.6bp. These auctions also featured the highest levels of indirect bidder participation in the specified time period, which more than made up for their below-average direct bidder participation (the lowest since 2022). Additionally, a positive-slope regression line highlights the connection between weaker auction performance and higher acceptance of dealer bids, supporting the notion that primary dealers act as a backstop for Treasury auctions and that a higher dealer takedown typically means lower end-user demand at the auction.
The recent elevated level of demand at refunding auctions compared to reopening auctions is particularly relevant given the charge released by the Treasury Borrowing Advisory Committee with the latest quarterly refunding documents. The slide deck explores the potential upsides and drawbacks of shifting 2-, 3-, 5-, and 7-year notes from a monthly issuance schedule to a quarterly one. This suggested cadence, with one refunding auction and two reopening auctions every quarter, is similar to the current schedule for longer-term Treasuries (albeit with different months for refunding auctions).
Before we get TO this afternoons liquidity event we’ll have to get through this mornings ‘flation data and from same shop, another of Global Wall Streets fan favs,
Asymmetries skew CPI trading risks
Going into CPI, there are five 'asymmetries' that leave the market more vulnerable to pricing out rate cuts in 2023, than pricing more rate cuts in, including: i) some slowdown in inflation is a necessary but not sufficient condition to allow the Fed to ease in 2023; ii) the market has considerable easing already priced for 2023; iii) the data expectations have a skew. The median for core CPI is 0.3%, but Bloomberg has 34 forecasts at 0.3%; 30 at 0.4% and three at 0.5%.; iv) financial conditions relatively benign response to regional banking woes, has given the Fed less cause for concern; v) having erred on the side of being too optimistic on inflation through 2021 and 2022, the burden of the data is to prove to the Fed that inflation has slowed enough to get back on a 2% target track.
…Which brings one to the main bullish rate arguments:
that the non-linearity driving the banking sector travails, and its credit implications, will push the Fed away from 'a pause with a possible further tightening' mentality, towards a' pause with a likely next move to cut'. Lower core inflation is still a necessary condition for the Fed to more readily address banking sector woes through rates policy, and this bullish rates scenario already looks priced. Part of the bullish curve price action, is the fear that if a credit crunch evolves, it will require aggressive easing, skewing the probability adjusted policy rate to the downside. There is then some limit to upside in rates, as long as the credit - growth collapse story is a fear…
The piece goes on to detail various FX reactions and scenarios.
With meetings at WH yesterday, one of many questions that is near and dear to ME answered by BBG via ZH
Treasuries Will Find Enough Takers On Debt-Ceiling Impasse
Authored by Ven Ram, Bloomberg cross-asset strategist,Front-end Treasuries have fallen since Friday’s non-farm payrolls data and Monday’s much-anticipated Senior Loan Office Opinion Survey from the Fed. Still, the increase in yields can only go so far.
While markets were expecting a middling number on the jobs front for April, US employers were still hiring at full speed. Only three of 77 in Bloomberg’s survey had imagined the number would be north of 250k, and coming hot on the heels of the banking turmoil, that expansion was particularly significant. Hourly earnings increased and the unemployment rate extended its decline from a multi-decade low. The Fed reckons that we need a jobless rate of 4.5% to align supply in the economy with demand, but we got a number that went the other way. Clearly, the long tail of the economy will continue to wag.
The SLOOS report proved to be long on excitement, but short on what it ultimately delivered: US lenders tightened their standards in the first quarter, but not by a whole lot. The more interesting read-out showed the weakest demand for credit among large and mid-size firms since 2009.
So it wasn’t a shocker to see two-year yields clawing their way back to 4%, some 20 basis points higher than before the payrolls data.
Even so, front-end Treasuries may find the equilibrium range has moved lower to between 4.00% and 4.20% - and there are enough factors that will support bonds.
President Joe Biden is due to meet Congressional leaders later Tuesday, with Senate Republican leader Mitch McConnell warning that there is no “secret plan” to solve the debt-ceiling impasse.
While we have seen this movie before, the uncertainty will do the economy no good and push it that much closer to a recession.
For now, front-end yields may nudge higher, but there isn’t too much fuel left in the tank.
For somewhat more on SLOOS, back TO large German institutional research
DB proxy rate: Bank lending offsets easing financial conditions
In this piece, we update our proxy rates with the release of the Q2 Senior Loan Officer Opinion Survey (SLOOS). Monday's SLOOS data showed some further tightening of lending standards as well as a clear deterioration of loan demand and banks' willingness to lend to consumers. At the same time, other financial conditions have eased, mostly as a function of an intensification of market expectations of Fed rate cuts in the wake of the recent banking turmoil.
As a result, our proxy rate that takes into account yields, spreads, and other high-frequency conditions showed a dramatic easing from March to the first week of May. Adding in the bank lending channel, however, largely offsets the easing attributable to the other high-frequency conditions. Both versions of the proxy rate including the SLOOS remain near 7% and have fallen only about 30bps since their March levels.
There remains tremendous uncertainty about how recent bank stresses will evolve and how much they will tighten financial conditions. Based on our proxy rates, the further tightening in bank lending conditions has largely offset the easing from lower yields and other high-frequency variables but has not, on net, produced a further meaningful tightening. This update therefore raises some questions about whether tighter credit conditions will substitute for Fed rate increases as much as initially anticipated.
DB proxy rates
For even MORE on SLOOS, the good doctor is IN and asking,
SLOOS was on the loose today, yet stock prices continued to snooze.
The Fed's Senior Loan Officer Opinion Survey was released yesterday after the market's close. It showed that banks continued to tighten their lending standards following the banking crisis that started during the second week of March (chart). Yet the DJIA barely budged falling 56.88 points and the S&P 500 lost just 0.46%. The S&P 500 VIX ended the day at 17.7. The spread between the yields on US high-yield corporate bonds and the 10-year Treasury note continued to meander around 500bps, as it has for the past year.
Ho-hum, but why? Perhaps investors believe that the Fed must be done tightening given the cracks in the banking system. We believe so too since the banking crisis in effect amounts to a hike in the federal funds rate of 100bps in our opinion. Fed officials may actually welcome this news since tighter bank credit should slow the economy and bring inflation down.
… So should we run for the hills? We note that December's SLOOS showed that credit conditions were tightening before the banking crisis, yet the four major categories of commercial bank loans all ended in record high territory through the end of April (chart). We will continue to monitor the weekly data on actual lending to assess whether loan officers are cutting back on their lending by as much as suggested by the latest SLOOS. Stay tuned.
Interesting and perhaps NOT as supportive OF the PIVOT priced (CME FedWatch Tool HERE) and yet, as detailed by this mornings
… Given the market prices in an 36% probability of a cut in July (from a 69% probability at the intra-day lows on Thursday) this is a fascinating release. Recent inflation releases have seen a steady decline in the headline CPI rate, which is now down to “only” +5.0%. However, the problem is that core CPI has been much more stubborn, and overtook the headline rate last month by ticking up to +5.6%, which is clearly still too fast for the Fed to be comfortable. In terms of what to expect today, our US economists are looking for headline CPI to have risen by +0.37% on a monthly basis, which would keep the annual rate at +5.0%. And they see core up by +0.32% on the month, taking the annual rate down two-tenths to 5.4%. Markets have been a bit more open to the prospect of another hike since Friday’s jobs report, with a 16% chance of a June hike now priced in, up from a 30% chance of cut intra-day last Thursday.
Sticking with ‘DC’ theme but moving across town, here’s a take from a large French operation who recently made some labor moves of its own, depleting one of Bloombergs departments,
BNP US cycle end: From hot to what? Labor market evolution to guide Fed
KEY MESSAGES
Despite surprising labor market resilience, we believe a drop in employment is likely on the horizon. Our analysis suggests an outright decline may not materialize until later this year.
A wide range of leading US job market indicators are pointing to significant cooling, masked by an overheated starting point. We explore the degree to which structural changes related to the pandemic are still at play, identify indicators that may remain more reliable guides ahead, and demonstrate that the labor market recovery may be slow if our call for recession this year plays out.
With the economy operating near stall speed, a Fed aiming for a soft landing may find labor market resilience to be overstated.
Same shop has a few words on the game of debt ceiling chicken,
US: Clock ticks more slowly, inflation expectations (mostly) moderate
KEY MESSAGES
Despite actual inflation remaining sticky and slow to move down, overall inflation expectations have shown a cooling trend, suggesting the risk of unanchoring is receding. This is welcome news to monetary policymakers – recall that last summer Fed Chair Jerome Powell referred to destabilized short-term inflation expectations as a “ticking clock”.
Widely-followed measures, such as the University of Michigan 1-year ahead, have increased as of late, likely due in part due to gasoline prices. At the same time, the Indirect Consumer Inflation Expectations measure - which examines the gap between realized wage growth and consumer income expectations and thus asks consumers about the concept in terms they use in everyday life - has declined appreciably, although it remains above other gauges of inflation expectations.
The road for disinflation will be bumpy (read our April CPI preview HERE, dated 8 May), with occasional spikes in short-term measures of inflation expectations. With the level of expectations still elevated, risks remain that they settle at these higher levels.
Finally, attempting to end on a high note, a few visuals for us visual learners. I’ll begin with a weekly chart pack — a walk through multi asset macro themes,
CSFBs Multi Asset Macro Pack: Key Market Themes
… The S&P 500 held key support from the 63-day average last week but remains capped below its 4195 YTD high and we maintain our bias of looking for a top here, seen confirmed below 4052/48.
For another hot take on longer end of the curve,
BBG: 5 things to start your day
…Normally this sideways pattern would suggest greater consensus on the rate path. But to the contrary, the price action reflects investors’ bifurcated view of the economy. On one hand, bond bears are saying an historically tight labor market fuels inflation. On the other, Treasury bulls view banking sector woes and less lending as an impediment to growth.
Blackrock’s iShares 20+ Year Treasury Bond ETF or TLT’s daily trading range is getting narrower. The pattern of tighter daily ranges along with the convergence of key moving averages often portends a major breakout one way or the other. It’s possible bond bulls are too pessimistic on banking stocks. They have pulled out quite a performance in recent days including Tuesday, with PacWest Bancorp going from the worst performer in the KBW Regional Banking Index to the best.
Unless core CPI comes in much lower than anticipated it will kick the can down the road on sticky inflation and keep up the fight with bond bulls who think high inflation and rate hikes will tip the economy into recession.
AND with the 2yy in mind, a different context via fintwit and Nautilus Research,
AT NautilusCAP
U.S. 2-year Yield cross below 1-year MA (after above at least a year.)12:31 PM · May 4, 2023
See and analyse the data for yourself and then ask if yesterday’s reFUNding 3yy liquidity event was all that surprising?
For somewhat more, a bit of context via DataTrek
2 & 10-Year Treasury Yields After the Fed Starts to Ease
By Jessica Rabe
Fed Funds Futures currently give the highest odds for 2-3 rate cuts by the end of 2023, so how do US Treasuries perform once the Fed starts lowering short-term rates? We looked at the yields of 2-year and 10-year Treasuries in the 1-month, 3-months and 1-year after the first Fed rate cut of the last 6 easing cycles back to 1990. The dates of each initial rate cut are:
July 12, 1990: The Fed started cutting rates just before Iraq invaded Kuwait in August 1990, which caused an oil price shock.
July 5, 1995: Rate cuts to avoid a recession during a classic mid-cycle slowdown.
September 28, 1998: Fed cut rates in response to the Asian financial crisis and the collapse of the hedge fund Long-Term Capital Management.
January 2, 2001: An emergency rate cut, with others following, in response to a slowdown in economic growth amid the bursting of the dot com bubble.
September 17, 2007: Fed cut rates to address recession concerns at the start of the Global Financial Crisis.
July 31, 2019: Fed cut rates to avoid recession amid slowing US economic growth, uncertainty surrounding US-China trade tensions and Brexit.
While these 6 instances are a small sample size, they encompass a wide array of exogenous shocks as well as more normal economic conditions. Therefore, they offer useful insight into how US Treasuries respond at the start of Fed rate cutting cycles in a variety of macroeconomic and geopolitical environments.
Here is what we found:
Treasury yields 1 month after first rate cut:
2-year Treasury yields: Lower in 5 out of 6 years (83 pct win rate)
10-year Treasury yields: Lower in 1 year, flat in 1 year, and higher in 4 years (17 pct win rate)
Takeaway: 3 months after the Fed starts cutting rates, 2-year Treasuries almost always rally while 10-years typically sell off. Two-year Treasury yields were lower by an average of 28 bps in 5 out of 6 years. The one exception was in 1995, with the 2-year yield up 12 bps. Conversely, 10-year Treasuries mostly sold off in the first month after an initial rate cut, with yields higher by an average of 21 bps in 4 out of 6 years.
The upshot: Investors have been much more likely to benefit from getting long 2-year Treasuries instead of 10-year Treasuries in the month following the Fed’s first cut of an easing cycle. One might think markets would discount the start of a rate cut cycle in 2-years before the Fed starts reducing short-term rates, but history clearly shows otherwise.
Treasury yields 3 months after first rate cut:
2-year Treasury yields: Lower in 5 out of 6 years (83 pct win rate)
10-year Treasury yields: Lower in 3 out of 6 years (50 pct win rate)
Takeaway: 3-months after the Fed’s first rate reduction of an easing cycle, 2-year Treasuries typically rally, while 10-years are a coin toss. Two-year Treasury yields declined by an average of 44 bps in 5 out of 6 years and were higher in just one year (1998) by 28 bps. By contrast, 10-year yields were higher in 3 years by an average of 19 bps and lower in 3 years by an average of 25 bps.
The upshot: Once again, getting long 2-year Treasuries is a surer move than backing 10-year Treasury yields during the first 3 months of the beginning of a rate reduction cycle.
Treasury yields 1 year after first rate cut:
2-year Treasury yields: Lower in 4 out of 6 years (67 pct win rate)
10-year Treasury yields: Lower in 3 out of 6 years (50 pct win rate)
Takeaway: One year after the Fed starts lowering rates back to 1990, 2-year Treasuries are more likely to have rallied than 10-year Treasuries. Two-year Treasury yields fell by an average of 180 bps in 4 out of 6 years. The two exceptions were in 1995 and 1998, when yields rose by an average of 93 bps. As for 10-year Treasuries, it’s once again a coin toss. The 10-year yield rose by an average of 81 bps in 3 years, and dropped by an average of 93 bps in 3 years.
The upshot: Odds are on the side of 2-year Treasuries over 10-years in terms of rallying during the first year of a rate cutting cycle. Two-year yields also tend to fall by more than 10-year yields when they do decline during these periods (lower by an average of 180 bps versus 93 bps).
Bottom line: History clearly shows Treasuries with shorter maturities (e.g. 2-year Treasuries) are more likely to rally in the first month, 3 months and year of a new easing cycle than those with longer maturities (e.g. 10-year Treasuries). That makes sense, as 2-year yields are more sensitive to rate policy and should therefore benefit more from ever lower Fed Funds rates.
What ELSE happens AFTER FIRST CUT?
Bloomberg’s Authers: For markets, desperation is the new fear. Be afraid
… In recent history, there’s only been one way to get the curve back to its usual shape, which is for the Fed to cut rates. The following chart, suggested by Joe LaVorgna of SMBC Nikko Securities, shows that in the last four decades curves revert only after the first cut:
That is the central case for imminent easing, and it makes sense. However, a number of economists are offering counter-arguments. The inflation data is perhaps most important. The last four decades have also featured quiescent price rises. The return of significant inflation for the first time in more than a generation could change the calculus. The continuing low in unemployment also makes a big difference.
AND while the S&P closed yest @ 4119, it should be noted that was the same as LAST Tuesday and so … thanks for playing … THAT is all for now. Off to the day job…