while we slept; 3mo10yr curve (and math); ‘Worst is yet to come’?
Good morning. Ahead of NFP I’ve learned over the years that less said the better.
Here is a snapshot OF USTs as of 705a:
Looks to me that month/quarter (FY Japan) giveth and April Fools taketh (bid from bonds) … HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
Treasuries have reversed lower and the curve slightly steeper (out to 10's) as US stocks and bonds reverse some of yesterday's quarter-end moves ahead of NFP and ISM. DXY is modestly higher (+0.1%) while front WTI futures are little changed. Asian stocks were mixed, EU and UK share markets are modestly higher while ES futures are showing +0.5% here at 7am. Our overnight US rates flows were unavailable this morning and overnight Treasury volume shows ~90% of average with futures turnover appearing higher relative to cash...… updated look at Japan's weekly net foreign bond flows from the MOF. It looks like Japanese investors bought into the early 2022 sell-off before turning into a pretty consistent seller over the past, say, 2 1/2 months amid rising inflation and changing CB rhetoric.
… and for some MORE of the news you can use » IGMs Press Picks for today (1 April) to help weed thru the noise (some of which can be found over here at Finviz).
While it was an historically bad quarter for the bond market (topped only by the Civil War, Depression and the 80s), lets not forget some WSJ reporting last night
Then there’s this interpretation of the curve, from BBGs Five Things last night
Yield curve inversions the past week or so have spurred plenty of concern that a U.S. recession is on the cards, but that’s actually coincided with a robust rebound in stocks. That may be partly because at least some investors are taking Federal Reserve Chairman Jerome Powell at his word when he says he can rein in inflation without severely damaging the economy. Others may have simply decided that stocks offer better opportunities than bonds as the latter head for unprecedented losses.
In fact, it turns out that curve inversions aren’t the key danger points for stocks. The real worry is when curves resteepen. The S&P 500 declined substantially in the early 2000s and again in 2008-09 after two-year Treasury yields dropped back under 10-year yields to reverse the inversion. The same occurred even around the end of 2019 when the curve only briefly dipped below zero.
Ruh Roh Relroy …
One LAST BBG link … a weekly FI newsletter with reference to the curve AND BMO,
The weekly fix: cherry-picking the yield curve; blockchain bonds
… It’s an esoteric discussion, and one that we should be having in a fixed-income newsletter. While the 2s10s seems to be the most popular curve in markets -- and has a fairly decent track record -- the San Francisco Fed found in a 2018 paper that actually, the gap between three-month bill rates and 10-year yields is the “most useful term spread for forecasting recessions.”
And to be fair, the Fed’s favorite yield curve* is quite steep at the moment. It currently stands at 186 basis points, versus negative 2 basis points on 2s10s. Early this week, the spread stood at over 200 basis points -- the steepest level since 2017.
So, that would suggest that perhaps we shouldn’t be ringing the recession alarm bells just yet. But Priya Misra of TD Securities wrote in a note this week that the 3m10y curve isn’t super relevant at the moment given that the hiking cycle has barely begun, and bill yields move in tandem with policy rates. Ian Lyngen and Ben Jeffery of BMO Capital Markets walked through the math on their weekly podcast:
“So, if we do see 50 basis-point rate hikes in May and June, that will get that spread to 88 basis points, to say nothing of the fact when the Fed starts to unwind SOMA, the go-to issuance sector for the Treasury Department initially will be the bill market. And unlike further out the curve, the supply and demand dynamic is particularly strong in bills. So, the incremental supply will push rates even higher, contributing to further flattening in three month bills versus 10s.”
I should have stuck with THE single best curve visual I’ve stumbled across so far
I hope to have somewhat more AFTER the NFP dust settles and with monthly / quarterly closes in mind. But … THAT is all for now. Off to the day job…