(USTs richer / flatter out to 10s on above avg volumes) while WE slept; from "...The record short position in Treasuries is not all that it seems..." TO 'large specs' net short in 10s largest EVER'
Good morning … after a rough couple weeks in the bond market, well, this
Triangulation. Bullish momentum. Debt deal. ‘Flation. Economics … Long weekend. POSITIONS. Lots of moving parts for us all to see whatever we wanna see. From a friend who remains on an institutional FI desk who continues to offer a continuous stream of play-by-play,
Good morning. Asian equities drifted lower while European equities have moved higher by about half a percent.
U.S. equity futures are higher with the Dow 0.25% higher, S&P 500 .58% higher and Nasdaq up 1.17% as it continues to out-perform.
Credit spreads are firming with cap structure 1-5 bps tighter on spread across markets.
In sovereign bond markets, Asian markets are mixed but European govies are rallying as are U.S. Treasuries.
Most of core and peripheral Europe are 1-5 bps richer but Swiss is catching a flight to quality bid, out-performing Europe having rallied 11 bps in local market.
In commodities the energy complex is lower by about 1% in crude, gas, and heating markets.
Copper is 2% higher and other base and precious metals are also gaining. USD index is 0.17% lower…
AND … 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 richer and flatter out to the 10y point amid generally risk-parity friendly conditions (SPX +22pts) with markets encouraged by an ‘in principle’ US debt deal. Volumes are running ~140% the 30d average in TY futures, EGBs modestly underperforming ahead of heavy syndication pressure this week (noted above). Overnight desk flows saw better buying from both FM and RM in the long-end amid flattening outperformance. Asian stocks were mixed as Chinese shares slid into a bear market, dragging the region lower despite several markets were poised to hit new milestones (KOSPI +1%, NKY +0.3%). The DXY is a tad weaker this morning (-0.2%) while commodities are also on the back-foot (CL -1.2%, HG -0.2%).… UST 30y yields will be the first benchmark to see daily momentum flip bullish after this morning’s ‘gap lower’ in yield, which could extend the ‘steepener squeeze’ we noted in our weekly video series on Friday.
So if BONDS are first to flip bullishly, I must be doing it wrong … anyways, for some MORE of the news you can use » IGMs Press Picks for today (29 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…
First UP … here’s what I noted Global Wall Street WAS saying over the holiday weekend … AND here’s what Global Wall St is sayin’ … Granted holiday weekend just no in rear-view mirror and with debt ceiling bill on table, there’s been very little comment and so, just a couple under the tree this morning to rip open. Lets begin with this one,
Goldilocks: Banks, Interest Rates, and the Fed
Popular accounts pin much of the blame for the banking stress on the Fed’s large rate hikes and the inverted yield curve, often assumed to be a tough environment for banks that borrow short and lend long. From that perspective, the Fed’s plan to fight inflation by keeping the funds rate restrictive—and the yield curve therefore likely inverted—might seem challenging for banks.
But recent economic research shows that banks actually tend to hedge their interest rate risk very well by matching the interest rate sensitivity of their interest income and interest expense (the deposit beta), so well in fact that their net interest margins have been largely uncorrelated with cyclical fluctuations in the fed funds rate and the slope of the yield curve in recent decades.
What then is different this cycle? Banks have become more uncertain about their future deposit betas and deposit outflows because the depositor base now includes a larger share of run-prone uninsured accounts than in the past, because the abrupt shift from a slow-and-low Fed hiking cycle to an unusually rapid one invited miscalculation, and because of technological changes like online banking and social media. These changes made the large unrealized losses caused by rapid increases in interest rates more dangerous and contributed to the recent bank failures.
Why are banks still hesitant to lend now that the rapid deposit outflows of March have stopped? One reason is that the optimal composition of loans and other assets depends on the increasingly uncertain deposit beta and outflows, and misestimating them is costly. Banks are also worried about credit risk at a time of widespread recession fears and now also anticipate an eventual tightening of regulation. These problems can amplify each other—if banks worry that excessive losses could spook depositors and already fear losses from interest rate risk, they might be especially wary of also risking large credit losses in the event of a recession.
We expect an incremental rather than a dramatic further tightening in lending standards because recession fears had already caused a substantial tightening by last fall and because large banks have been less affected by recent events. Recent data on bank lending standards look consistent with this expectation, although anecdotal evidence paints a more dire picture.
We estimate that credit tightening will reduce 2023Q4/Q4 GDP growth by 0.4pp. From a starting point that looked a bit too strong in Q1, that would be fine and even helpful in keeping demand subdued so that supply can continue to catch up. Some parts of the economy are likely to be hit harder, especially real estate, manufacturing, and small businesses in small towns.
We see three implications for the Fed. First, banks should be able to endure a high funds rate and an inverted yield curve, but concerns about bank stress will likely limit the speed of further hikes and the peak rate. Second, the credit tightening looks real enough to substitute for a hike or two, though it is too soon to say that it precludes further hikes. Third, moderate bank stress alone is unlikely to prompt rate cuts, but monetary policy could be an “automatic stabilizer” for banks in a more adverse scenario—if unrealized losses revived run risk and caused a severe credit crunch, cuts in response to the economic impact would relieve the pressure on banks…
Read on for more and all of their details and once you’ve done that and IF you should desire more of a WORLDLY view, well,
MSs Weekly Worldview: Undaunted by China’s Weak April
Despite the shift in market sentiment due to weaker Chinese growth in the second quarter, we are still upbeat about our view for growth this year.
AND for our inner stock jockey,
Barcap U.S. Equity Strategy: Long & Short of It
2023 has seen a sea change of positioning and flows. Light equity exposure heading into 2023 led markets to defy fundamentals. But a rebound in discretionary and systematic buying suggests this window is likely closed. Brace for a range-bound equity market with an asymmetric risk/reward, in our view.
… Our risk and positioning framework captures discretionary exposure through four key areas: cross-asset positioning, cross-asset retail flows, sector and style allocation trends, equity volatility and derivatives landscape, and systematic exposure through risk parity and volatility control funds. The schema below show a bird’s eye view of the funds universe and data sources we utilize to paint a (almost) complete picture of how investors are positioned. The sections that follow dive deeper into the key elements of our framework.
… Bond Positioning
The record short position in Treasuries is not all that it seems. Quite the contrary, demand for long duration assets from asset managers has actually been on the rise with their focus shifting from inflation to recession risks. That along with vastly increased supply of Treasuries stemming from Fed QT has favored the highly levered basis trade by macro hedge funds. This has led to a buildup of record short speculative bond futures positioning at the front of the curve. The current debt ceiling negotiations have the potential to undermine the profitability of this arbitrage and force deleveraging in the Treasury market.
While it may be true and the short in USTs may NOT be all that it seems, at least according to one view, another more simplistic view is that the short is large, growing and, well, did I say large? How large?
Hedgopia’s CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned
It took them a while, but futures traders have at long last stopped wasting money expecting an improbable outcome.
Until last week, they were pricing in this month’s 25-basis-point hike to be the last one in the current tightening cycle and for the fed funds rate to end the year at 450 basis points to 475 basis points. The benchmark rates are currently in a range of 500 basis points to 525 basis points.
In fact, until two weeks ago, they were expecting three 25-basis-point cuts by year-end. They doggedly stuck to this view, even though Chair Jerome Powell and his team made it loud and clear that they saw no easing this year, although he did drop hints at the May 2-3 FOMC meeting that they were ready to pause in the June meeting.
Fast forward to now, and these traders are now assigning a 64-percent probability to a 25-basis-point raise in next month’s (13-14) meeting, to a range of 525 basis points to 550 basis points, ending the year between 500 basis points and 525 basis points with one cut.
First, Powell deserves credit for not caving in to spoiled markets’ undue demands. Secondly, the futures traders still expect one cut this year, which, given how inflation and the job market are behaving, does not look like it is forthcoming…
I see highest EVER and, well, it’s gotta give you a reason to pause and think what NEXT. Typically, I’d say when everyone on the same side of the boat, well, it TIPS. I do see DAILY momentum as having crossed BULLISHLY (noted above) and so rates COULD very well move measurably lower and remain well within (redrawn)triangulation pattern.
Lets see how the deal shapes up and what, if any impact could be penciled in. Generally speaking, though, a deal would represent some amount of CERTAINTY (or removal of UNcertainty) and beneficial TO risk assets. As flows (continue)to go from ‘risk free’ rates TO stocks, well yields would COULD move higher which I’d imagine benefits those seeking yield and, well, the other side of that coin, would be those who have to pay it … This would seem to me to continue to PRESS banks NIMs and serve to make situation somewhat MORE untenable (than it already is) and while higher rates (if they materialize) might then serve to alleviate SOME of the need for further hikes, a higher equity market might well blind the Fed into reading as another GREEN LIGHT (ie nothing’s broken) …
On the other hand, there might just be enough willing and ready to BUY flood of issuance (noted over the weekend) WHEN the deal passes and the current concession (ie higher yields) will be viewed as such…
I’m continuing to noodle over the most likely path and … THAT is all for now. Off to the day job…