weekly observations (10/23): longs stopped, engage in shorts; "Longer-dated interest rates USUALLY touch the Fed Funds Rate"; # states w/trend rise in URATE = slowdown all hoping for (?); REPO MAN ...
Good morning / afternoon / evening - please choose whichever one which best describes when ever it may be that YOU are stumbling across this weekends note…
This weekends note should simply end now. But it won’t.
I just stumbled on a story on Bloomberg.com detailing the consumer from CAR OWNERSHIP point of view.
Clearly (another)something impacted by interest rates, stimmy and the pandmoniamemic…
Interesting to read and contextualize as we’re heading into the home stretch (Q4 where managers and traders try to cement bonuses and / or MAKE UP FOR LOST TIME / GROUND) and into the holidays …
IF consumers are impaired, well … just as if they are locked into low rate mortgage and cannot / will not MOVE for that great new job or opportunity, well …
Car owners apparently feelin’ the squeeze at a rate with historical context.
Bloomberg- Car Owners Fall Behind on Payments at Highest Rate on Record The risk of vehicle repossession is rising for many Americans facing a budget crunch.
… With interest rate hikes making newer loans more expensive, millions of car owners are struggling to afford their payments. It’s a clear indication of distress at a time when the economy is sending mixed signals, particularly about the health of consumer spending.
The percent of subprime auto borrowers at least 60 days past due on their loans rose to 6.11% in September, the highest in data going back to 1994, according to Fitch Ratings. In April that figure slipped from a previous high of 5.93% in January. But after burning through tax returns, contending with a shakier job market and grappling with still-elevated inflation, more car owners have become delinquent.
Behind the surge is both higher car prices and borrowing costs. And with the Federal Reserve indicating it plans to keep rates higher for longer, the problem is likely to persist, especially as millions of Americans recently started paying their federal student loans again.
“The subprime borrower is getting squeezed,” said Margaret Rowe, senior director with the asset-backed securities group at Fitch. “They can often be a first line of where we start to see the negative effects of macroeconomic headwinds.”
Arielle Larsen, a 27-year-old college student in Maryland, knew it was risky to neglect her car payment, but she just didn’t have the money. When she looked out her window one morning in mid-August and couldn’t see her 2015 Toyota Prius, she immediately knew what had happened: repossession…
REPOSSESSION … so I suppose this will be perceived as a net POSITIVE for holiday spend cuz, Arielle will now have all that free cashflow? Sorta like super storm Sandy was an economic stimulus (?)
You get the point … have at THE STORY which ends with another similar story ‘bout a young gal — a bartender … who’s folks helped loan her some cash to get HER vehicle back,
… “When the economy takes a hit, I feel it,” she said. “I make $2 an hour and live on tips. When things get more expensive, people have less money and they’re tipping less. So there goes my wages.”
… and I’ll move on AND right TO the reason many / most are here … some UPDATED WEEKLY NARRATIVES … some of THE VIEWS you might be able to use (in a similar sorta way you’ll find content if you pay for ZH PREMIUM?
Except to say I’ve NO idea how they worked out deal to be SELLIN other folks thoughts.
I’m just makin’ mention of it … curious minds.
In any case, here … some UPDATED WEEKLY NARRATIVESand linkswhich should work IF you have permission …
THIS WEEKEND, a couple / few things which stood out to ME this weekend …
Apollo- Credit Spreads Are Disconnected From Credit Yields (still waiting for shoes to drop and here’s ANOTHER fine place to wait / watch / see leading signals)+
BAML- The Flow Show: Buy Signal (bit about Girl Scout cookie prices UP to $6 from $5 is what caught MY attention, to be honest…)
… Tale of the Tape: box of Girl Scout cookies price up from $5 to $6 this season; can’t blame them given restart of US student loan payments, end of subsidized childcare, home & auto loan costs at 20-year highs (30-year mortgage rate at 8%) and TV streaming services raising prices.
… The Biggest Picture: US nominal GDP up a remarkable 40% past 3yrs & reacceleration in Q3 (7-8% ann., Chart 2); no US recession because no job or wealth insecurity; this market believes Fed “behind-the-curve” and avengers needed to curb DC’s non-stop enthusiasm for spending; higher yields…harder landing; risk a trading buy but Big Low awaits bear positioning, recessionary EPS/GDP forecasts and policy panic (Chart 4).
Barclays- Once again, we upgrade our near-term outlook (econ department pulling a logical and common sensical Keynes move)
… Once again, we upgrade our near-term outlook Reflecting the strong data, we now expect next week's advance Q3 estimate to show a 5.0% q/q saar increase in GDP, a 1.0pp upgrade from last week, in line with our latest upward revisions to the tracking estimate…
BMO weekly “Waiting to See; Seeing the Weight” (stopped outta long 2s, looking to get short 10s … so, quitters never win and winners never quit? if at first you don’t succeed? never mind … best in biz here so read all ‘bout it)
GS rates weekly - Strong data raise yield floor (raise the roof, raise the floor oh, whatever, I’m a terrible dancer and cannot keep up … I know I know, when the facts change, we all quote JM Keynes)
… Although recent data raise the likelihood of a higher near-term floor for yields, we continue to believe yields are unlikely to rise much further on a sustainable basis. Our previous study, based on the average magnitude of similarly sharp selloffs, suggested that the current range reset may top out around 4.8%. Having exceeded that level, we believe the move up could face its next challenge around 5.1-5.25%, roughly the yields investors would earn on money market accounts or T-bills. While we think current yield levels already make a compelling medium-term case for owning bonds, the value will be harder to ignore when yields no longer trade at a clear discount to cash alternatives…
JPM - US FI Markets WEEKLY (**MISSED NOTING THIS YEST** UPDATING RATES FORECAST…)
… Raising our interest rate forecasts We last made changes to our interest rate forecasts in early-September, and a lot has changed since then. Obviously, yields have risen nearly 75bp over the interim, so this could be a mark-to-market exercise, but what have we learned to shape expectations? First, it’s clear that term premium has risen sharply over the period, as the deviation from our fair-value model indicates fundamentals can only explain half of the move over this period. Indeed, we have argued that term premium would need to rise as the pillars of Treasury demand would need to shift from price-insensitive buyers like the Fed, US banks, and foreign investors to more price-sensitive investors (see In the eye of the beholder, 9/12/23). However, we thought that this trend would evolve over months if not years, and would be somewhat offset by expectations of easier Fed policy as growth slows into 2024. Instead, this has happened in a matter of weeks, as the ACM measure of term premium has risen 70-80bp over the last 3-4 weeks, the likes of which we have rarely, if ever seen over the last 15 years (Figure 12)…
… As a result, we make a round of wholesale adjustments to our interest rate forecasts, with the bulk of the adjustment coming over the next two quarters (Figure 14). Notably, we raise our 10-year YE23 target from 4.20% to 4.75% and our 3Q24 target from 3.80% to 4.0% to reflect these dynamics. The forecast also assumes the belly richens further, resulting in a 2s/5s curve that remains somewhat inverted, but more broad curve steepening than we had previously expected…
MS global macro weekly “A Haunted Halloween?” (jedi mind trick if rates go higher we’ll then hit a peak and drop … why? positive ‘er carry as rates go higher)
… A peak in yields ahead? Given the role of technicals, and in particular, the role of leveraged funds in selling long-end duration, it is important to understand the impact that positive carry has played. With an inverted 30y-SOFR yield curve, selling 30y Treasuries has been positive carry – an incentive for leveraged funds to sell duration. However this positive carry could flip if 30y yields rise another 10-15bp – potentially halting the selloff in Treasuries.
Nordea - Macro & Markets: High forever (interesting / catchy title — that is the point — AND ends with a visual which is straight forward and worthy of consideration …)
Wells Fargo - Hiring Accelerated Across States in September: Climbing Unemployment Rates Raise the Risk of Economic Slowdown
Moving along and away FROM highly sought after and often paywalled and Global Wall Street narratives TO a few other things widely available and maybe as useful from the WWW
AllStarCharts- So then NOT Transitory? (AND … what it means - watch EARL and prices at pump and you too can be inst FI / rates guru…)
Did you think inflation was just going to come and go?
Just like that? And now we all move on?
I highly doubt that it’s that simple.
According to the bond market, inflationary pressures are likely just getting started.
This is a $120 Trillion asset class that’s so big there’s just no where to hide.
For instance, take a look at the Inflation-protected Treasury Securities, that we refer to as TIPs. And when you compare them to nominal yielding Treasury Bonds, you’ll notice the new 52-week highs this week in the ratio between the two.
This is what the bond market is pricing in for inflation. Not the angry economist on the internet. Not the pretty lady on basic cable.
This is the bond market. This is whose opinion actually matters:
Let’s zoom out and take a look at this ratio with the price of Crude Oil overlaid.
Notice how the bond market’s inflation expectations move tick for tick with Crude Oil Futures:
So what does this environment mean for investors?
AllStarCharts- Yields Cut a Path for Energy Stocks (they lost me after YIELDS…)
… Have no fear: We can still lean into market areas that enjoy a rising rate environment, mainly energy.
Here’s the US 30-year yield breaking to its highest level since the summer of ‘07:
Owning the stock market averages will prove difficult as long as yields press higher.
The same story applies to bonds, as rising yields directly equate to falling bond prices.
Check out the US 30-year bond futures flashing one sell signal after another:
A shelf of former lows at approximately 105 marks our next downside target.
I like remaining short the 30-year bond toward our next objective. But only if it trades below 111.
Bloomberg- Bond Market’s Bad Tidings Start to Overwhelm Miracle Stock Rally
… “We’ve seen bond rates increase over the last few months and stocks, all of them, are long-duration assets, and they can only take so much increase in real interest rates before they begin to soften,” said Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management. “The risk was there and we’re beginning to see that realized.”
… “There’s a point at which there’s an alternative to equities and we’re in that world now,” said Art Hogan, chief market strategist at B. Riley Wealth. “It’s clear that if you’re looking for yield, you’re going to find it in a much safer place in US Treasuries.”
Bloomberg- What’s the Basis Trade? Why Does It Worry Regulators? (important question, NO visuals but a good QUICK read)
… 2. Why are regulators worried? The profit from these price differences is so tiny — as little as a small fraction of a penny — that arbitrageurs typically borrow lots of cash to multiply their bets. Hedge funds usually borrow in the so-called repo market, where banks, money-market funds and others lend capital for short periods. Hedge funds post their Treasury holdings as collateral, and usually have to roll over their borrowing every day. What makes this strategy risky is the combination of high leverage — as much as $50 borrowed for every $1 in capital invested — and heavy reliance on short-term borrowing. For example, when funding costs in the repo market rise abruptly — which can happen when there isn’t enough cash sloshing around the banking system — the trade is no longer viable. Volatility in the Treasuries market can also increase the cost of the trade, killing its profitability. When these things happen, hedge funds have to rapidly unwind their positions to repay their loans, which increases volatility. Those price fluctuations can lead to a drying up of liquidity, or the ability to find ready buyers. When that happens, Treasuries markets can seize up. Treasuries are considered risk-free and are so fundamental to the credit markets that the US Federal Reserve, on the rare occasions when this trade has impaired the normal functioning of the market, has been compelled to make significant interventions…
Bloomberg (via ZH) - Treasury Loss? You're Also Paid Back In Depreciating Dollars (depreciating dollars … well THIS doesn’t sound very nice at all if you ask me — which you didn’t … but, ‘adding a sting in the tail to any / all LONG ONLY nursing losses STILL / AGAIN in HTM portfolios…oy)
Authored by Simon White, Bloomberg macro strategist,
Selloffs in Treasuries are compounded by the real loss in the purchasing power of the dollars they are denominated in.
US Treasuries are in the midst of their worst drawdown, or peak-to-trough decline, for at least half a decade, with the Bloomberg Treasury Index down over 17% from its peak.
At first look, the slide appears small, compared to the other major assets. However, for longer-duration Treasury debt, using the iShares 20+ Year Treasury Bond ETF with ticker TLT as a proxy, the maximum drawdown is approaching 50%. That’s still smaller than gold, the Nikkei, Bitcoin, the S&P 500, but huge for an asset that is supposed to be “risk free”.
But we are in an inflationary world again, so it is real values that matter most. Using US headline CPI indexed to 100 in 1990, we can build real indices for each asset. Applying US CPI for all of them means we can compare like for like. Now, when we look at maximum drawdowns, we get a different picture. It is no longer the S&P 500 with the largest one (in the Great Depression), but the dollar.
The dollar has seen a maximum peak-to-trough fall of 91%, which occurred in the 1970s. The dollar declined in nominal terms, but inflation rose sharply through the decade, meaning the dollar’s real value was eviscerated, being worth only a tenth of its purchasing power at the end of the 70s versus what it was at the beginning. The closing of the gold window in 1971, the Arab oil embargo in 1973 and the Iranian revolution in 1979 all contributed to its decline.
The decline of the real dollar’s value when inflation is elevated is an additional kick in the shins to those holding Treasuries: what you’re paid back in is losing value in real terms too. Since the end of 2019, the dollar is down ~9% in real terms, compounding the 11% total loss in Treasuries over the same period.
As the 1970s showed, the dollar’s real value is acutely exposed to elevated inflation, adding a sting in the tail for those already nursing losses in their Treasury positions.
Following up the worst total return for bonds with the second-worst year in history?
---- We spent much of last year pointing out the record losses in the bond market (red). However, the reversion to the mean that many expected in 2023 never materialized (blue).
Bloomberg’s U.S. Aggregate Index is now down 3.42% YTD on a total return basis and is within striking distance of becoming the second-worst total return year on record (data goes back to 1976).
Hedgopia- CoT: Peek Into Future Through Futures, How Hedge Funds Are Positioned (some long bond short covering but still hefty spec short base ‘out there)
StockCharts.com - S&P Breaks Below 200-Day Moving Average: It's Going to be a Big Volatile Ride (while SPX below 200dMA nice, focus on part about BOND YIELDS RISE … connect dots. go ahead…)
WolfST- Why Longer-Dated Treasury Yields Spiked. It’s Not Magic: Yield Solves All Demand Problems
Tsunami of issuance meets Fed QT, Skittish Foreign Buyers, and US buyers demanding to be compensated for the risks of out-of-control deficits in an inflationary environment.
… Here’s the tsunami of supply.
The total amount of Treasury securities outstanding has now reached $33.6 trillion. Of that amount, $7.1 trillion are securities held by government entities, such as government pension funds, the Social Security Trust Fund, etc. They’re not traded, and those entities buy the securities directly from the government, and so they don’t have a direct impact on supply and demand in the market.
The remainder, $26.5 trillion, are Treasury securities held by the “public.” The public includes foreign holders, the Fed, banks, bond funds, insurance companies, individuals, and me (only T-bills so far).
These securities held by the public spiked by nearly $1.8 trillion in the five months since the end of the debt-ceiling standoff, and by over $10 trillion, or by 65%, in five years, from $16 trillion in January 2019 to $26.5 trillion now!
This new issuance of $1.8 trillion in five months needed to find buyers. And yields must rise until every last one of these securities is purchased by the “public.”
And here is demand by the biggies: International holders and the Fed.
International holders are still buying but not keeping up. They increased their holdings of Treasury securities to a record $7.71 trillion in August, as of the latest TIC data by the Treasury Department (red line in the chart below):
Japan, #1 US creditor, increased its holdings to $1.12 trillion (green).
China and Hong Kong combined, #2 US creditor, further reduced their holdings to $1.01 trillion (purple).
The top six financial centers (London, Belgium, Luxembourg, Switzerland, Cayman Islands, Ireland) increased their holdings to a record $2.27 trillion.
So on net, foreign holders are still adding to their stash of Treasury securities, with some, such as China and Brazil, unloading; and with others, such as the biggest financial centers, India, and Canada, adding to their stash.
But they haven’t kept up with the US government debt that has been ballooning at an incredible speed in recent years, with trillions whooshing by so fast they’re hard to see.
And so the share of foreign holders of the US debt held by the public has plunged. Ten years ago, they held 45% of the public US debt; but now, despite the increase of their holdings over this period, their share has dropped to 29%.
In other words, they’re still adding, but not nearly fast enough to keep up with the growth of the US debt. And other buyers have to be enticed with higher yields to fill the gap.
The Fed, oh dear. During the huge binge of QE, when it interfered in the bond market on a daily basis by buying trillions of dollars in Treasury securities of all kinds over the years, the Fed turned into the biggest most relentless bidder in the bond market, thereby repressing yields across the yield curve. Then it ended QE, and did the opposite, QT…
… AND for any / all (still)interested in trying to plan your trades and trade your plans in / around FUNduhMENTALs, here are a couple economic calendars and LINKS I used when I was closer to and IN ‘the game’.
First, this from the best in the strategy biz is a LINKthru TO this calendar,
Amazing Weekly wrap up. You're doing god's work
YES.........
Amazing work !!!!!!!!!!!