while we slept; "Bond Sell-off For The Ages"; stocks GET REALz (in '22); 'team transitory' is back?
Good morning … An absolutely historic move yesterday in the bond market requires an epic rant but unfortunately, that ship has sailed and I’m no longer paid by the word to detail the ins / outs of what happened and lay out a path forward.
Instead, this morning (after), here’s what I’ve got for you. A quick VISUAL recap of what was one of (if not THE)largest swings in rates over past 5yrs
A "Bond Sell-Off For The Ages” indeed. From oversold to OVERBOUGHT and now back TO the middle (nearly — slow stochastics, bottom panel, highlighted)
Somewhat more on the epic selloff just below BUT, on a day where / when we’re all tracking Pelosi’s plane like we do Santa’s sled on XMAS, after JOLTS suggest Labor Market CRACKS (JOLTS suffer 3rd largest PLUNGE on record, ZH) and THEN, hawk talk FedSpeak SLAMMED STOCKS … (ZH).
The point of ZH and generally speaking is, at this stage of the game, ‘damned the torpedoes, full speed ahead’ … A good friend sent me BBG OpED worth noting,
… here is a snapshot OF relatively STABLE USTs as of 720a:
… HERE is what another shop says be behind the OVERNIGHT FLOWS in their morning comment, “Crossroads at 2.75%”,
Overnight Flows
Treasuries were little changed overnight with 10s at 2.75% and 2s/10s at just -32 bp. Overnight volumes were elevated with cash trading at 133% of the 10-day moving-average. 5s were the most active issue, taking a 30% marketshare while 10s were a second at 26%. 2s and 3s combined to take 28% at 16% and 12%, respectively. 7s managed 7%, 20s 2%, and 30s 6%.… For now, however, the market appears content to refocus on the ongoing debate as to the ability of Powell to navigate the US economy away from a high inflation environment without triggering a meaningful slowdown that significantly undermines the prevailing strength in the labor market. It’s with this backdrop that we’re continuing to view 2.75% 10s as a buying opportunity; with a nod to the event-risk presented by Friday’s employment report.
… for some MORE of the news you can use » Finviz.
To the (Global Wall St wiz-kid)INBOX, Batman … The FIRST thing that caught my eye was couple descriptors of the increased bond market volatility that was yesterday.
The selloff yesterday was one that stands out to anyone IN (or now somewhat removed from) the rates trading / investing game over the past few years.
John Authers of BBGs latest,
The Importance of Pelosi and Taiwan on Bond Swings
A bear market in bonds has been a long time coming — it’s about four decades since the last one ended. And after the US saw inflation hit its highest levels in 40 years (since the bond bull market started), fueling bets that the Federal Reserve would embark on the most aggressive tightening campaign in a generation, it seemed that the bear market had finally started.
But cold feet remain. Yields have dropped precipitously in recent weeks, despite the lack of any clarity that inflation is over. And that led to an extraordinary trading session Tuesday as they boomeranged back upward. House Speaker Nancy Pelosi can claim a starring role with her fraught visit to Taiwan. Barring only the two worst days of the first Covid shutdown, and the Monday in June when the Fed leaked its intention to hike by 75 basis points at its next meeting, this was the biggest daily gain for 10-year yields in five years:
How has this happened? Over the last 40 years, whenever the trend appeared to be about to break, the Fed would respond with cheaper money and bring yields back down again. Its emergency response to the pandemic helped rates to drop to record lows in 2020. With the return of inflation, that pattern appeared to have broken, leading to this year’s surge in yields. But since June, it has been as though the market trod on a rake. Ten-year yields dropped by a full percentage point:
DBs early morning REID ALSO notes,
… In fact, the 10yr US move yesterday was the 4th biggest in the last 5 years behind 2 Covid days and the WSJ leaked 75bps story just before the June FOMC last month. The 2yr move was the 4th biggest in the last decade with 9 of the top 10 happening so far in 2022 with one just after the Covid lows. So we're still seeing big volatility in markets. As we go to print, yields on the 10yr USTs are -4.18bps lower, currently at 2.71%. We did highlight that one of the reasons that August is usually bullish for bonds is that corporate issuance is light and thus leaving investors having to park money in government bonds. However, the surprise of the first two days of August is how much US corporate supply there has been. Bloomberg reported that we're already seeing supply estimates for the entire month surpassed already. So maybe some money rolled out of Treasuries yesterday that was loosely parked there.
ANOTHER thing that caught MY attention is one for BOTH bond AND stock jockeys because, you know … (real)rates matter
… The Figures show last 12 months of history of the S&P and IG credit spreads together with 5Y5Y real rates. While there has always been some dependence of risk assets on real rates, their commonality takes new dimension shortly after the first rate hike in March when it firms up as real rates rise accelerates. In mid-May we argued that, with the projected real rates trajectory, equities could reach their bottom around 3700 by mid-June. Since then, S&P hit its lows of 3667 on Jun-16 after which it rebounded in lockstep with the decline in real rates.
Not a fan of only 12mo of history BUT the point made couldn’t be clearer
Another point being made clear — well, actually this is more of an OPINION being expressed — is that inflation will remain higher for longer. Almost makes sense as things normalize (they will normalize, won’t they) given the extreme of rates having remained lower for longer. In any case, from Goldilocks,
Shelter Inflation: Higher for Longer
… As these pandemic-related factors unwind, we expect official CPI rent inflation to continue to run very hot until it catches up to the price level implied by the alternative data. We expect CPI shelter to increase by 0.6-0.7% each month for the next several months before slowing to a 0.4-0.5% sequential pace by year-end. This path implies that shelter inflation will peak at around 7% year-over-year later this year.
Beyond this year, our fundamentals-based shelter inflation model points to a deceleration to a still robust 4¾% at end-2023 and 3¾% at end-2024. As a result of our higher shelter inflation path, we now expect core PCE inflation to stand at 4.5% year-over-year in December 2022 and 2.6% in December 2023.
From the CHARTS department — and one which is timely given the bond markets vol (noted above) just as rates have gone from overSOLD to overBOUGHT
What happens with OIL PRICE DRIVEN ‘flation matters TO bonds and macro. We - including The Fed - are ALL watching.
Reuters was kind enough to produce this COLUMN right on queue,
Inflation beaten? 'Team Transitory' re-emerges
… Rates markets are already peering over the hump and despite all the hawkishness from central banks feel the worst of the episode may have passed - even if visibility is limited for policymakers and investors alike.
Futures markets now see U.S. Federal Reserve policy rates peaking by the turn of the year at about 3.35% - about one percentage point above current rates, but also some 65 basis points below where they saw the so-called 'terminal rate' in mid-June and now occurring three months earlier than assumed back then.
As significantly, they pencil in about half a point of rate cuts from there through 2023…
… In a presentation to the G20 last month, Bank for International Settlements economist Hyun Song Shin reinforced the supply shock message by showing how inflation jumped even though the rebound in real GDP in both developed and emerging economies remained substantially below the five-year pre-pandemic trend.
"The charts...reinforce the message that the recent surge in inflation is not simply a story of excess demand that overwhelmed the pre-pandemic trend supply of the economy," he wrote. "Rather, it is a case of diminished supply capacity that has not kept pace with the recovery to trend."
Fed funds futures and 2-10 year Yield Curve
Inflation pulse
Meanwhile, as we watch and wait Jackson Hole symposium the end of August and the next FOMC meeting (September), lets NOT forget the BULLISH BOND SEASONALS.
One potential offset may just be the so-called “Inflation Reduction Act” of 2022,
Sorry. NOT sorry … THAT is all for now. Off to the day job…
The Bond Market is worried about Nancy? That really is looney tunes. Give the Chinese a little credit. They are building their own space station and sending robotic missions around the solar system. Is the Bond Market discounting Kamala is a couple more Covid positive tests away from the Oval? Seems just as likely to me Joe bogs down with Long-Covid in the short-term. Presidents tend to have 'strong' wives who often fill the void ...