while WE slept; 10s to PEAK (@4.20%, no NOT Elon Musk); $31 trillion dollar distraction;
Good morning … IMF CUTS its global economic outlook (ZH snark HERE) and the world yawns. Treasury Department throws a 3yr auction party and DEALERS were required - ZH, “Medicore, Tailing 3Y Auction Sees Jump In Dealer Award”. This leads to next natural question … Got10s?
Auction today … and if you believe BIDEN — slight RECESSION — or are watching UK Gilt yields — which are MEASURABLY HIGHER today, again — for concession / direction …
… 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 mixed with the curve steeper as UK 30yr yields have recaptured the 5% level again while the UK 2s30s curve has steepened over 35bp since yesterday's close in doing so (see links above). DXY is little changed while front WTI futures are little changed (+0.3%) too. Asian stocks were mixed (Chinese shares firm), EU and Uk share markets are mixed while ES futures are showing +0.5% here at 6:45am. Our overnight US rates flows saw a firming in Treasury prices as USDJPY pressed through the 146 level where the authorities last intervened. Flows were light with better buying seen from credit-linked names. London's open was predictably choppy amid conflicting stories out of the BOE. Overnight Treasury volume was about average all across the curve.… Our last attachment is a re-post from last week updating the overlay of SPX and 2yr real yields (inverted). Powell seemed to be puzzled by the dovish market reaction to the July FOMC presser even though 2yr reals generally responded as he might have expected (risen further). But the mid-summer rally in stocks still stands out as head-scratching, perhaps playing some catch-up in recent days...
Put another way, by REUTERS no less,
Morning Bid: Confusion reigns
… and for some MORE of the news you can use » IGMs Press Picks for today (12 Oct) to help weed thru the noise (some of which can be found over here at Finviz).
Now as week #2 of QTR #4 underway, and the wait for HIMCOs latest quarterly continues, a few other items which may be of interest.
DB offers An update to our forecast framework: 10y UST yield to peak at 4.2%
We update our rate forecast using a probabilistic approach and illustrative scenarios for the fed funds rate and term premia. We take the DB US econ team’s funds rate forecast as our baseline and view the balance of risks as skewed towards more persistent inflation and higher policy rates.
We project a peak 10y UST of 4.2% this quarter vs. our prior forecast peak of 3.85%. Yields decline and the curve steepens next year as the Fed reaches the terminal rate, with 2s10s turning positive late next year.
The forecasts shed light on the conditions needed to reach certain yield levels. For example, for the 10y to move above 5%, the longer-run nominal funds rate and 10y term premium need to reach the highs of the past 30 years. Similarly, a sub-2.5% 10y likely necessitates a zero or negative r-star and the term premium remaining very low relative to its long-run average.
Barcap updates on Flow of Funds
Outflows accelerating
Indicators of demand for US fixed income continue to paint a negative picture. Custody holdings at the Fed again fell, mutual fund outflows accelerated, primary dealer holdings increased and banks were net sellers of Agency MBS. Net long positions for asset managers rose across most futures contracts.
MS: UK Rates Forecasts – 10-year Gilts at 5%
In our base case, UK yields rise despite any near-term BoE purchases. We believe that for a structural stabilisation the market needs a reduction in the weekly issued net DV01, through either fewer gilt sales or ongoing QE. Energy prices are key to issuance and hence yields due to the price cap.
MORE from MS on what seems to be an equally large issue,
The 31 Trillion Dollar Distraction
US public debt has created problems in the past, but figuring out who will buy it hasn't been one of them. Aside from creating too much demand, or not enough, the problem with debt always has been predicting the price at which it will be bought and value it will provide. $31 trillion is just a distraction…… Modern monetary theory (should have) laid to rest concerns about government debt in countries who issue in local currency. And while some exceptions exist, like the eurozone where a member country can issue in euros, but can't print them by fiat, the US isn't one.
Focusing on government debt also occupies time that should be spent elsewhere. Debt issued by the private sector can have a cataclysmic impact on economies and markets. Debt obligations outside the US government rose above 300% of GDP in 2007 – an amount that exacerbated the Global Financial Crisis caused by higher rates on some of it.
US government debthas ballooned since then – more than tripling in real terms and rising from 43% of GDP to over 100%. However, other US dollar-denominated debthas stayed relatively constant in real terms,and has fallen dramatically relative to the size of the US economy (see Exhibit 13 and Exhibit 14).
… We suggest macro investors pay more attention to central bank policies and reaction functions, and the economic data that feed into them, than the overall amount of government debt investors will need to purchase, or which investors will do the buying.
To paraphrase a famous line from the movie "Field of Dreams", if you sell it at the wrong price, a buyer will come.
Then there’s this topical, timely KIMBLE chart,
Then there is this — an official commentary on the USD — as US Treasury Secretary Janet Yellen said the strength of dollar is the “logical outcome of different policy stances”.
Oh, ok then. And from the FRBNY on inflation expectations (via ZH),
Then there’s this gem from FRBSF
FRBSF Economic Letter: What If? Monetary Policy in Hindsight
If the Federal Reserve had expected the upcoming inflation surge back in March 2021, would it have acted differently? A new method to tackle such “what if” questions suggests that it may have been preferable to only moderately raise the federal funds rate during 2021, even with perfect foresight. In that case, inflation would have been about 1 percentage point lower as of June 2022, while unemployment would be about 2 percentage points higher. This result reflects the importance of the Fed’s dual mandate of price stability and maximum employment.
As John Boehner used to say — IF only IFS ANDS AND BUTS were CANDY AND NUTS then every day would be XMAS … THAT is all for now. Off to the day job…