while we slept; belly BID; 'Earl DOWN on this tweet; Fed 'accounting primer'; past peak hawkishness...
Good morning. Good economic data (in the form of ReSale Tales, but ‘there’s just one thing’… ZH) was TRUMPED by US/Russia tensions and a BLINKEN headline …
That said, lets jump right in and join along with some price discovery
WHILE YOU SLEPT
Treasuries are modestly higher with the belly slightly outperforming (see attachments) on a very light day of news flow- so far. There was, however, an earlier report from Sputnik News that Ukraine fired mortars into Luhansk, pressing 10y Tsy yields to 1.96% at one point overnight before returning >2%. DXY is little changed (+0.1%) while front WTI futures are lower (-2.1%). Asian stocks saw gains in China and mixed results elsewhere, EU and UK chare markets are mixed while ES futures are showing -0.5% here at 6:45am. Our overnight US rates flows saw early Asian real$ buying in 10's and 30's during there hours that at least partly reversed into the London open. In London's morning hours our flows were extremely light again. Overnight Treasury volume was ~110% of average overall.
The firm goes on to detail some news AND the BELLY outperforming a smidge and here I’ll focus on the firms WEEKLY visual as it IS Thursday and we’re almost at a cherished 3d weekend,
US News: Citi Economist's take on yesterday's [substantially stale] Minutes Citi Authers on central banks and liquidity, curves and credit spreads... BBG Opinion Gas prices hit an all-time high ($4.72) in California Oilprice Some see $7gal in the near future Yahoo CDC: better times ahead AP …
… There are some interesting things to see in the butterflies. Indeed, our first three attachments give the daily, weekly and monthly chart treatment to the Treasury 2s5s10s 'fly. The daily chart of the Tsy 2s5s10s 'fly highlights how recent belly out-performance has taken this 'fly to its local range support near 24bp, as drawn in. The belly looks locally 'overbought' (lower panel) and there is some evidence of developing divergence (lower lows in 'fly recently; higher lows in momentum. The overall look here is that 5's have outperformed enough recently to bring the 'fly to a support where the path richer (for 5's, on curve) should be harder-fought from here? Moreover, our second attachment zooms out to the weekly chart of 2s5s10s which shows that this 'fly is also testing a major, year-long uptrend that also happens to be the bottom-side of a pretty well-defined up - channel . Needless to say, the 24bp area is the key support for 2s5s10s that needs to be watched. Weekly momentum still guides lower for this 'fly (lower panel) so while a near-term rebound might be expected, the look is that 24bp support may eventually give way in the weeks ahead. Then the longer-term, monthly chart of 2s5s10s is next to provide context where the whole up - channel of the past year appears long-term 'overbought' (lower panel, circled) which, itself, is hardly a surprise after 2s5s10s recently probed near the cheapest levels (for the belly) witnessed since the GFC. Our 4th attachment shifts focus to the monthly chart of the 2s3s5s Treasury 'fly where it's gunning for the highest (3's cheapest) monthly close in well over a decade. No surprise there as the crowd expecting 7 Fed hikes this year grows RTRS.
A few more things to keep in mind ahead of this mornings Initial Jobless Claims data which DB reminded this past weekend (HERE),
… Thursday's jobless claims (215k vs. 223k) take on somewhat elevated importance given that they correspond to the survey week for February employment. We expect further improvement in initial claims, which have retraced a significant portion of the omicron-related surge in January. Recall that claims peaked at 290k during the January employment survey period, hence further improvement should bode well for the February employment report on March 4 – the last jobs report the Fed will see before its March 16 FOMC meeting.
Moving along to these words which are of great value from a large German bank and an early morning reid,
… for some MORE of the news you can use » IGMs Press Picks for today (17 FEB) to help weed thru the noise (some of which can be found over here at Finviz).
…This morning Asian markets have put in a mixed performance following the release of those Fed minutes. Mainland Chinese stocks are trading higher with the Shanghai Composite (+0.35%) and CSI (+0.62%) both advancing, and the Kospi was also up +0.43%. However, the Hang Seng (-0.62%) has reversed its early morning gains, and the Nikkei (-0.85%) is trading lower after Japan’s exports grew less than expected due to slowing external demand coupled with global supply constraints. The data showed exports rose +9.6% y/y (vs. +17.1% expected), with the country also recording its biggest monthly trade deficit in eight years. Looking ahead, equity futures are pointing lower in the US and Europe, with those on the S&P 500 (-0.50%) and DAX (-0.67%) both down.
Oil prices also have also been under pressure overnight amidst the prospects of an Iranian nuclear deal being reached, with Brent crude down -1.09% to $93.78/bbl. Meanwhile, USTs extended their retreat with the 10-year yield easing -4.4bps to move back just beneath the 2% mark, at 1.995%.
Moving on to / thru the inbox a few things I wanted to bring forward. First up given yesterday there was more than a bit about the liquidity in government bond markets, the following from gate-keeper of all things POSITIONS related, wrote of …
UST Liquidity Pressures
… Around $6m of new shorts added yesterday on subdued activity as Ukraine worries mildly subside with no change in thematic - extended shorts and profits dominate. Meanwhile flows in cash/swaps we see AM now under invested/net short, Banks remain buyers in 30s and HF continues to build into steepeners in 10s / more curvature. Focus remains on the short side at levels where short profits squeezed.Meanwhile under the surface liquidity pressures are building driven by a combination of higher volatility (driving liquidity withdrawal) and otr/oftr widening of spreads as the end of QE approaches - we see the most acute pressures at the front end where “instantaneous liquidity” was already challenged before the recent volatility.
Front end: Eurodollar: Highly extended shorts/profits in whites but more balanced in reds. In white more than 50bps of profits buffers - shorts only at risk on moves above 98.15 in ED Dec 22. However in greens/blue we see flatteners building and risk/return to fade this move is improving => steepeners
Short TY positioning becoming extended but profit vulnerable to richening above 126-16
30y extended shorts / steepener build still very much in play (WN $18m short / 3.5/ 90th percentile) with short profits start to be squeezed above 182-16. Meanwhile ALM we see the beginning of an ALM bid by US account on the move 2.30%.
Curves: 2/10s flatteners highly extended and in profits below 80bp, meanwhile in 10/30s steepeners dominate but losses below 35bps
Cross market spreads: Extremes held in short Bund/Long USTs but profits remains small and vulnerable to UST underperformance (TY/RX offside above 179bps => 4bps of profits).
Food for thought. As always, the (Clubber Lang)PAIN trade is what we’re looking for. And speaking of PAIN, some updated FI TECHS from 1stBos show a short bias across the board and I’ll highlight thresholds of PAIN (ie moves AGAINST shorts)
5yy: We turned tactically bearish again at resistance at 1.825%, with scope for support at 2.00%, where we would turn tactically neutral. Resistance trails higher to 1.81%, below which we would also turn tactically neutral.
10yy: We opened a (cautious) tactical bearish bias again following last week’s pullback to resistance at 1.975/965%, with next support seen at 2.16/18%, where we would turn tactically neutral. Next resistance is seen at 1.89%, below which we would turn tactically neutral.
30yy: We stay tactically bearish, looking for a move to support at 2.42%, where we would turn tactically neutral. We would also turn tactically neutral below resistance at 2.21%.
Now, with a look across global macro, one thing that has become front-and-center is the price of ‘Earl, given the impact on everyone’s personal situation every weekend when we pull up to the Costco gas pump and wonder if it will EVER mean revert, even just a little … the tweet below by Iran’s top nuke negotiator @Bagheri_Kani,
This will ALSO ripple through global macro as high and rising ‘Earl = inflation = hikes and QT and so, somewhat TRANSITORY price spikes, then would = ?
Insert your own math and please show your work.
And while it may be too early for math, I thought the following from MSs newest addition — Seth Carpenter — who has written overnight about losses for the Fed IF it chose to sell assets.
Fed Accounting Primer
Like any balance sheet, the Fed has assets, liabilities, and capital. Total assets are currently about $8.9trn, comprising $5.7trn in Treasury securities, $2.7trn in mortgage-backed securities (MBS), and $0.5trn in other assets. The Treasuries and MBS are the primary interest-bearing assets and have an average coupon of about 2.3%. On the liability side of the balance sheet, there is $1.9trn in reverse repos (RRP), $3.8trn in reserve balances of banks, which are interest-bearing at the rates set by the Fed. In addition, $2.2trn in currency, roughly $0.7trn in the Treasury’s general account (TGA), which are zero-interest liabilities, and about $0.3trn of other liabilities and capital.Some simple arithmetic allows us to get a ballpark estimate of the “breakeven rate” for the federal funds rate, that is the level where interest expense reaches interest income and the Fed’s net income is wiped out. Currency and the TGA jointly are roughly 1/3 of the liabilities, which implies that the average interest expense across all liabilities is only 2/3 the rate paid on reserves and RRPs. If we roughly approximate those rates by fed funds, when the federal funds rate is 3/2 times the average coupon on assets, net income will be zero. The Fed’s current average coupon is 2.3%, so the breakeven rate is about 3.5%. At rates below this breakeven, the Fed is earning profits, which, after accounting for operating costs, are remitted to the Treasury. For reference, in 3Q2021, the Fed remitted $31bn to the Treasury, reducing the Treasury’s need to borrow.
Can the Fed make losses, and would losses put the Fed into negative equity? The answers are “yes” to the first question and “no” to the second…
If the Fed were to sell securities at a loss, the loss would be reflected in the income statement, reducing net income, and therefore the remittance to the Treasury. Possible sales of MBS are currently being discussed…
Do these (hypothetical) losses matter? From the perspective of the operation of monetary policy, for all intents and purposes, the answer is “no.” …
Bringing all this to a conclusion of sorts, a few words and a visual from BBGs Cormac Mullen because, in the end, what matters most is NOT my (or anyone’s)words but rather, how markets are pricing different outcomes. To whit,
… We may have passed the point of peak hawkishness, at least regarding the Federal Reserve's March meeting. Bets on a super-sized 50 basis point rate hike are being rapidly pulled back, with minutes of the January Fed meeting the latest to dampen the hawks' ardor. They showed no clear signal from policy makers of a 50-basis point move, despite most makers agreeing to the possibility of a faster pace of tightening. They also shone little light on plans to shrink the Fed's bond holdings. Swaps traders now put the likelihood of a bold move in March at just below a coin toss, having priced it in as an almost certainty last week, when U.S. inflation data smashed expectations. Still, some policy makers must be tempted by the opportunity to regain control of the narrative and push back against those who suggest they are behind the curve. That temptation will be enough to keep traders guessing even if a slow and steady pace of hikes would be more in line with the Fed's measured approach until now.
Maybe, just maybe then forward thinking (bond market’eers) are on to something as highlighted / noted in this mornings Robin Brooks (@RobinBrokksIIF) tweet
In other words,
… that’s all for now. Off to the day job…