(USTs modestly higher, belly leads on 50% of normal volumes) while WE slept; a steepening break lurking?; buyers of (long bond)DIPS; BoJ
Good morning … As the year winds down, there will be less output from Global Wall Street and I will also take the opportunity to step away from the keyboard … After tomorrows likely short update, no further updates until the new year and with that in mind, thanks for stopping by on occasion and appreciate any / ALL feedback. Still unsure of where ‘this’ is going but it’s been a most interesting year for ME stepping away from the bond market — at least officially — and allowing me to ‘vent’ here has been great!
That in mind, some venting on what appears to be an aggressively UNCH bond market overnight (with slight belly bid) … Here’s a look at 20yy USTs,
I spy with my own eyes, a situation which makes 20yy look to have gotten overSOLD (momentum, bottom panel) but remain within current RANGE where 3.82% or so appears to REMAIN ‘in play’ and at very least, an important inflection point.
WHY am I looking at 20yy NOW? Well, for starters, how about that 20yy auction yesterday,
ZH: Yields Slide After Stellar 20Y Treasury Auction
Which came on heels of some economic funDUHmentals,
ZH: US Existing Home Sales "Frozen" In November, Biggest Annual Drop 'Since Lehman'
ZH: Conference Board Confidence Surged In December, Inflation Expectations Tumbled
… here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries are modestly higher, with the belly of the curve outperforming, while Treasuries outperform their UK and EU peer markets this morning on a light volume/news-flow overnight session. Asian stocks were mostly higher after the NY rally yesterday, EU and UK share markets are mixed while ES futures are showing -0.15% here at 7:10am. Overnight US rates flows were unavailable again (holiday party impacts?) while overnight Treasury volume was ~50% of average overall.… We'll next focus on the medium and long-term set-ups for the Treasury 2s10s curve. The weekly chart of 2s10s curve shows a dominating flattening trend (in place since mid-October last year when near +130bp) still in place. But in the lower panel you can see that notably 'oversold,' medium-term, weekly momentum is threatening a new steepening signal being confirmed at tomorrow's week-end close. Even more tantalizing for the beaten-down steepener camp is the next chart, the monthly chart of 2s10s curve. Deeply 'oversold,' the oscillator (Slow Stochastics) lines have merged which gives us a sense that curve flows are finally more balanced after being one-way flattener-biased since the summer of last year. Balanced flows give no fuel to an existing trend, of course. Anyway, the set-up for a momentum flip in favor of the macro steepener is exquisite but a monthly close is needed to confirm it and we may be running out of time for that to happen this month. But if the emerging signal in the weekly chart proves right, and that year-long downtrend is taken out with a close (EG: above -49bp next week), this should be enough to flip long-term momentum up, we reckon. We should add that monthly momentum looks similarly set-up to where it was in late 2018 before the curve spent the next ~6mo grinding even flatter before reversing. THAT is why we'd like to see the break of the year+-long flattening trend, along with an upturn in monthly momentum, before getting too excited about the idea that the low in 2s10s might already be in. It was such a trend-break and momentum upturn combo that got us thinking "higher 30yr real rates in 2022" back 11 months ago. Is 2s10s next for such a reversal? Stay tuned...
… and for some MORE of the news you can use » IGMs Press Picks for today (22 DEC) to help weed thru the noise (some of which can be found over here at Finviz).
Now for a few items — stragglers, if you will — dropped in TO my Global Wall Street Inbox since we last checked in.
Paul Donovan of UBS writes, 2023
What lessons should we take into 2023? In a perfect world, where economists run everything, the words “don’t trust the data” would be carved above every bank entrance. Investors have faith that data does what it says. It rarely does. Job vacancies do not record vacancies. Consumer prices are not a cost-of-living index. Goodness knows what non-farm payrolls are pretending to be. Ask yourself, who really answers surveys nowadays?
We should remember that people always adapt in the face of a crisis. Markets tend to extrapolate from the very worst circumstances—but people find ways cope with wars, pandemics, and the cost of living. Resilience is a feature of humanity that always seems to be forgotten.
There are eternal verities: never short the hedonism of the US consumer; always assume ECB President Lagarde is speaking; German growth data will frequently be revised stronger; the UBS morning comment will give analysis without jargon and with as much sarcasm as I can get away with…
From those words on the year ahead TO a few TECHNICAL CHARTS from 1stBOS in their final output of the year…
… Chart of the Day: We have repeatedly highlighted over the past few years the potential for a 5-year “double bottom” base in the 10yr JGB Yield and following yesterday’s tweak to the BoJ’s YCC framework, the market has reinforced this base and surged higher to test the 61.8% retracement of the fall from 2013 and the new upper end of the BoJ’s target range. Whilst this is clearly very likely to cap for now, the “measured base objective” projects a move beyond here going into 2023, with scope for a move to .585/625%, then potentially .70%. We expect this move higher to have a relatively limited impact on US rates markets; when the last central bank turns hawkish, it’s probably time to increase duration exposure, which remains our key message for 2023.
From Japan TO USTs where you’ll note firm staying tactically BULLISH 5yy (out ABOVE 4.04%), tactically BULLISH 10yy (out ABOVE 3.845%) and they’ve got this to say ‘bout BONDS …
… Short-term Strategy: Our modestly successful tactically bullish bias from support at 3.825% was neutralised following the break above support at 3.715%. However, we would initiate a fresh tactical bullish bias at support at 3.85%, with support at 3.935% expected to hold.
In other words, buyers of a further DIP …
Here are some thoughts (and VISUALS) from Hedgopia noting,
And here’s another something more on BoJ and of a different flavor — a take from ASteno which I quite fancy — if not one you can sink your teeth into and AGREE with, it should at least make you pause and think,
Bond Watch #1 - Why Bank of Japan's YCC tweak may be positive for US Treasuries
… Why this is NOT going to alter the bigger picture in USD bond space..
The long USD/JPY trade has been THE policy divergence trade of 2022 and the market has been net short the JPY throughout the year. The trend has been so intensive that the Japanese Ministry of Finance has instructed the BoJ to intervene against it several times throughout the year, which has allowed the BoJ to “burn” USD reserves in the process of doing so.
If the USDJPY trade reverses as a consequence of BoJs YCC actions, it may prove to be a biggie for USD fixed income, but in a counterintuitive way.
Chart 4. Positioning in USDJPY versus the actual moves in USDJPY spotWhen the USD strengthens materially as a consequence of a tighter Fed and tight USD liquidity, foreign FX reserves of USDs tend to lessen due to outright selling of USDs by foreign central banks. This has been the case in Japan this year as well.
If the YCC move from BoJ pulls the rug from under the USDJPY long, which was already running on fumes due to an exhausted Fed tightening cycle, it is likely going to make life easier for BoJ in FX-terms. A weakening USD allows BoJ to build USD reserves, while the opposite has been the case so far this year. If the BoJ can start rebuilding USD reserves, it also means that they can start adding USD bonds again.
This may prove to be a self-fulfilling prophecy with positive spill-overs to US Treasury bonds. A lower USDJPY reading -> more USD FX reserves in Japan -> More Treasury buying -> Lower USD rates -> A lower USDJPY … you get the loop by now..Chart 5: Stronger USD -> Less Japanese holdings of USTs and vice versa
The ultimate bellwether for whether Japanese lifers and pension funds buy USTs or not is the shape of the USD curve relative to the shape of the JPY curve. If the USD curve is steep (high 10s versus 1s), the JPY FX-hedged purchase of USTs looks attractive relative to JGBs (effectively receiving far-end USD-JPY rates versus paying front-end USD-JPY rates), while the opposite is true when the USD curve is heavily inverted as currently.
The current 3m annualized FX hedging cost of buying a 10yr UST seen from Japanese soil is closing in on 5%, which makes it very unattractive to buy USTs in Japan. A change of 25 basis points in the JGB curve is not going to alter that picture dramatically since the equation is already negative (3.70% 10yr yields - 4.90% annualized 3 month hedging costs).
A Fed pause or pivot is ultimately what will bring the Japanese lifers and pension funds back to the US Treasury table and a reversal of the USDJPY trade is a decent bellwether of that. The move in USDJPY is what you should care about instead of the tweaks to the 10yr yield in JGBs and ultimately this may turn out to be good news for USD duration…
For somewhat more of a different angle — or perhaps DIVERGENCE a better word, Bloomberg
… The yen calmed down Wednesday but there remains strong anticipation that the impact from the Bank of Japan’s surprise policy tweak will play out for some time to come. As Japan’s yields rise they will become more and more attractive for the country’s investors who stashed more than $3 trillion in overseas stocks and bonds. Swap yields, more nimble than those on bonds given the BOJ’s stockpiling of more than half the debt market, are charging toward 1% in the 10-year tenor.
With hedging costs remaining high and even more incentive to take out protection against moves in the yen, we could see a virtuous circle for the yen as money floods back in to the country and carry trades get unwound with both interest rates and the currency dynamics working against them.
Finally for another from BLOOMBERG, something NOT on JGB or UST related, here’s a look at BUNDS
… German 10-year bond yields are on course to rise above 3%, which would be in keeping with the cycles seen over the past two decades. The trend has been given extra momentum after this week’s surprise tweaking of yield curve control by the Bank of Japan. While there hasn’t been official word, bond traders may look upon the various central bank moves in December as a coordinated G-10 attempt to lift bond yields. Adding to the bearish case for European bonds is the participation of Japanese investors. French debt is their biggest holding, but if that is to be reduced as funds flow back to Japan, it is likely that German Bunds will also be under pressure. Indeed, should the BOJ tighten further in 2023, it wouldn’t be outlandish for the European Central Bank deposit rate to reach 4%.
I’ll leave you with this XMAS card of sorts (research / charts can be found p35 HERE)
… THAT is all for now. Off to the day job…
Hope you return for another year. Have a happy snow-apocalypse, polar-vortex, or whatever snarls our transportation infrastructure this Christmas gets labelled. Visiting the relatives in the dead of winter made more sense when it was just a sleigh (the original autonomous driving system with a living will to return without injuries to a warm and well provided stable) ride away. Whereas, "It takes around 6 million parts [manufactured around the world] to create one Boeing 747 aircraft." For example, there are 40000 rivets in just one wing. Time for a rethink?
Your work here has been helpful to me. The content is reliably focused and 'dense.' Making it very useful for this typically equity myopic trying to peel away some of the layers obscuring their understanding of how FI sees and interprets events. Hard at first, then rewarding.
Seems the old-worlders have a long history with short hedonism: https://www.journals.uchicago.edu/doi/full/10.1086/685674