while we slept (5y5y swaps); stocks vs bonds; a pre NFP tantrum brewing ...
While we were asleep here in central NJ the snow started to come down, schools got delayed and have since gotten canceled. The snow continues to fall and we’ve got about 6” so far. The kids will be home and together, under the direction of the missus, will clear our driveway and cars AND hopefully start earning their own way, clearing some of the neighbors. Here’s a look out the window,
But this is NOT the update I was referring to as if you cared. But to be honest, thinking about (or trading) markets BEFORE NFP (and the weekly closing prices of markets) seems somewhat less intriguing. As good as ADP was, OMI impact is still to be seen / heard / priced. Jan, Feb data points then will be even MORE difficult for the Fed ahead of that March FOMC meeting.For those who NEED to know what happened, this from BBGs @EddBolingbroke
Treasuries Steady Near Weekly Lows Before December Jobs Report
Treasuries steady ahead of December jobs report, with yields marginally cheaper across the curve but within Thursday session range. Bunds and gilts outperform Treasuries slightly, with European stocks remain near weekly lows.
Treasury yields cheaper by up to 1bp across long-end of the curve with spreads marginally steeper; 10-year yields around 1.725%, remain near top of weekly range
S&P futures higher by 0.2% while Estoxx50 and FTSE 100 are slightly down in early London session
December jobs report is due at 8:30am ET with current whisper number at 502k, above 447k estimate; Wednesday’s ADP print was 807k, well above 410k estimate
IG dollar issuance slate empty so far; Thursday saw $5.45b price, taking weekly total to just short of $60b vs. $40b projected; a total of $140b is expected for the month
Three-month dollar Libor +0.48bp at 0.23614%
U.S. economic data slate also includes November consumer credit at 3pm
Fed speakers include Daly (10am) and Bostic (12:15pm)
No U.S. coupon auctions until next week, when 3-, 10- and 30-year sales are schedule
Here are a few PRE-NFP words from BMO (who spends bulk of commentary talking about REALZ) regarding,
Overnight Flows: Treasuries were little changed overnight with 10-year yields in a range of 1.71-1.73%. Overnight volumes were elevated with cash trading at 167% of the 10-day moving-average. 5s were the most active issue, taking a 34% marketshare while 10s were second at 31%. 2s and 3s combined to take 19% at 8% and 11%, respectively. 7s managed 11%, 20s 1%, and 30s 5%. We’ve seen modest buying in 5s.
And finally, this,
WHILE YOU SLEPT
Treasuries have been led a hair lower by the 30yr point ahead of today's US employment release. Citi and the consensus look for a print today of ~450k. DXY is lower (-0.17%) while front WTI futures are modestly higher (+0.65%). Asian stocks were mixed (China tech shares +2%), EU and UK share markets are little changed while ES futures are showing +0.2% here at 7am. Our overnight US rates flows were active in Asian hours despite the looming US employment data. Fast$ sold the front end while real$ bought 10's. In the long-end, our desk saw an active 2-way trade from both real$ and credit-linked names. No available color from London's AM hours and total overnight Treasury volume was ~120% of average- hinting of a quieter trade in London after 2.5x average volume during Asian hours.
The commentary came along with a visual of 5y5y rate — proxy of the future,
US 5y5y swap rate, daily: Earlier this week we noted that 5y5y rate refused to close above ~2.03% during November despite 7 daily attempts to do so. Well, 5y5y rate shot up through that support yesterday only to close at that level. We're there again this morning where you can also see (lower panel) just how extended/'oversold' 5y5y rate is after its 45bp rise from December 20's low print. Too far, too fast?
Moving on and in as far as stocks vs bonds, well, their negative (inverse) correlation then makes USTs a GREAT HEDGE. You know. Like an insurance policy. Opposite of TINA (ok, well, maybe exactly like TINA but when she leaves, this visual makes ME want to be first in line at the Hobbits next reduced Treasury auction party). Here’s what I’m talking about, from Bloomberg,
The shocking start to the year for both stocks and Treasuries has reignited the debate about the usefulness of having bonds as a diversifier. But this is no vindication for those who have long warned of the death of the traditional 60/40 portfolio of equities and bonds. For starters, a week is too short a time frame to judge the benefit of a strategy designed for long-term investing. Thirty-day correlations between the Bloomberg Barclays U.S. Treasury Index and the S&P 500 Total Return Index remain deep in negative territory -- and even that timeframe is a little short. Secondly, assets don’t have to move in different directions to help protect portfolios from the wildest swings. The S&P 500 Index has fallen over 2% from its all-time high on Jan. 3, but a Bloomberg gauge of a 60/40 equity-bonds portfolio is down just 1.6% over the same period, despite the Treasury yield spike. Again too short a time frame to judge but worth illustrating nonetheless. Legitimate arguments can be made that bonds are too expensive, but then so are many stocks. And that's no reason to avoid the long-term benefits of having a diversified portfolio of both for many investors.
Wait, what? A week is too short a time period to decide what happens over the entire 12mo of 2022? Really? Who’d a thunk it…
One final thought (leader) from Bloomberg’s John Authers, ahead of NFP,
A Tantrum Could Be Brewing Ahead of Payrolls
Time for a Tantrum?
The Federal Reserve spent much of last year trying to avoid a repetition of the 2013 “taper tantrum,” when bond yields shot higher after the central bank started to discuss tapering off its asset purchases. It might have succeeded too well. As 2021 ended, yields were barely any higher than they’d started, and inflation was at its highest in decades.
It’s possible that the Fed might have preferred a tantrum. And it might now be helped by the ongoing reaction to the minutes of the last Federal Open Markets Committee meeting that hinted bond purchases might quickly be reversed and lead to winding down the central bank’s massive balance sheet. Judging by fed funds futures, investors now put odds of more than 80% on a rate hike as early as FOMC’s March meeting. The following chart shows the current probabilities, as calculated by the Bloomberg World Interest Rate Probabilities function, and compares them to projected interest rates immediately after the September, November and December gatherings:
Meanwhile, both nominal and real 10-year yields have risen sharply in the first week of the new year. The nominal yield has almost hit a pandemic-era high, while the real yield is at its most elevated level since June. A tantrum appeared to be under way last spring, but ended in March. Once again, like a petulant toddler, the bond market is threatening an outburst:
To give an idea of how “tantrum-like” conditions now are, this chart shows five-day changes in the 10-year real yield, going back 20 years. Outside of March 2020, when the bond market more or less ceased to function, the rise in the last week is the greatest since the original tantrum of 2013. That doesn’t mean that a true new one is already under way. Real yields are still very negative. But it’s consistent with how the markets would behave:
Those are the stakes for the non-farm payroll data for December, due Friday, and next week’s report on U.S. inflation. Judging by the research carried out in the bowels of the Fed, the FOMC will by now be very anxious that inflation could be coming untethered. So strong wages data as part of the payroll report, or a high inflation reading next week, could scare the bond markets yet more. The last days of December brought the New York Fed’s complex measure of underlying inflation — at the highest level in the quarter-century that it’s been calculated:
Meanwhile, the San Francisco Fed, which divides the consumer price index into goods and services both sensitive and insensitive to the coronavirus, provides good and bad news. Inflation is unambiguously dominated by the sectors most affected by the pandemic, as we might expect. Covid-insensitive prices are still not rising as fast as they were as recently as 2018. But even they are are inflating at more than 3%. And the advent of omicron could put yet more pressure on Covid-sensitive prices:
With so much reason to expect the Fed to err on the side of hawkishness, and the bond market plainly on edge, it’s best to brace for more excitement on the first Payrolls Friday of 2022.
One More Risk to Think About
The year is yet young, but in at least one respect, we’ve immediately returned to 2021. ICE Natural Gas futures in the U.K. have risen 52% since their low on New Year’s Eve. They’re still far below their peak during the December spike, but massive volatility in energy prices appears to be a fact of life in 2022:
A lot of money is running on a concerted attempt to reduce carbon emissions via a switch to renewable energy…
And now back TO the day job…