Bunds up OVER ZERO - BBG,
German Yields Cross Zero Threshold as Bond Selloff Intensifies
via Investing.com (540a)
And this just in to the inbox (702a)
… German 10yr yields go positive for the first time since 2019 WSJ German HICP inflation confirmed at a brow-raising 5.7% YoY in December, highest since 1993. Germany threatens to halt Nord Stream 2 if Russia attacks Ukraine ZH Italy mulls as much as $4.5bn to fight soaring power bills BBG
Treasuries are modestly lower and the curve a hair flatter this morning with German 10y yields going positive while the 1y3y US swap rate (see attachments) hit 2.00% for the first time since May 2019 ahead of sovereign supply in the US and Europe today. DXY is lower (-0.18%) while front WTI futures are +1.4%. Asian stocks were paced lower by Japan (TOPIX -3%), EU and UK share markets are mixed to higher (SX5E +0.5%) while ES futures are showing +0.15% here at 6:45am. Our overnight US rates flows saw another relatively active (much less turnover than yesterday though) session where we had solid 2-way flows in the long-end with Asian yield-targeting buyers emerging for bonds near 2.20%. The Fed's delayed 4.5y to 7y buyback should be held this morning barring further tech difficulties. Overnight Treasury volume was ~140% of average with 20yrs (241%) seeing the highest relative average turnover overnight ahead of this afternoon's 20-year reopening.
… UST 30yr yields: The bond took out support yesterday (2.174%) derived by the twin October high yield prints, a high in late June 2021 and a series of move lows seen in Q4 2019 going into the pandemic. The next solid support level for 30yrs is near 2.44%- the pre-pandemic range highs and a cluster of daily and weekly closing highs seen in the spring last year.
Speaking of heavy volumes persisting, from THE best in biz…
Treasuries held a narrow range overnight, with a slight bearish skew as 10-year yields reached 1.90%. Overnight volumes were elevated with cash trading at 148% of the 10-day moving-average. 5s were the most active issue, taking a 39% marketshare while 10s were a distant second at 29%. 2s and 3s each took 8%, combining to garner 16%. 7s managed 8%, 20s 2%, and 30s 5%.
Now that we know what it is took place overnight, a few Bloomberg.com OpEds. Some views as I’ve not had the needed time to put pen to paper.
First is regarding visual above,
Higher U.S. government borrowing costs are driving Europe’s benchmark yield into positive territory.
Next is John Authers latest iteration of ITS DIFFERENT THIS TIME (cuz markets saying so),
Markets Bet Things Are Different This Time. Really?
Rates probably will rise, as widely signaled and now priced in. The murkier question remains how inflation will behave.
… In the bond market, the shift upward in yields is growing dramatic. In nominal terms, the 10-year Treasury yield is at last back where it was at the beginning of 2020, before the pandemic. The real yield is still much lower, but has risen almost 50 basis points since its low near the end of last year:
Meanwhile, expectations for the Federal Reserve have been turned on their heads. Using the trusty WIRP function from the Bloomberg terminal, which derives expectations for the fed funds rate from fed funds futures, we discover that markets have effectively added one extra 25 basis-points hike for this year, just since Jan. 1. As recently as the beginning of the fourth quarter of 2021, it was thought to be on a knife-edge whether there would be any hikes this year:
…But most importantly, look at inflation. In the following chart, I’ve put the real S&P 500 (divided by the Consumer Price Index) on the right scale, and the annual change in CPI on the left. None of the first four times when yields started rising signaled an attractive opportunity to buy stock in real terms, and this was because inflation was generally high and rising. In the last three decades, with inflation under control, buying when yields started to rise generated good real returns each time — but this generally also involved buying at the bottom after a financial accident. It’s hard to say that the current situation is much like the Covid implosion of March 2020, for example, or the end of the post-Lehman collapse in 2008, or the Long-Term Capital Management meltdown in 1998. In all those cases, yields were rising but there was ample support for markets from monetary policy, thanks in part to low inflation. If inflation doesn’t burn itself out in short order, what are the chances that this will happen again this time?
The most important part of the bet that markets are now making is that inflation will indeed come down without too much coaxing. There are definitely technical pressures that should tend to push it downward in the next few months (along with some others that push upward), and the market is sensibly positioned for this outcome. But a lot is riding on this. It’s four decades since the Fed last started to raise rates with inflation this high — and the stock market of the last two decades is very different from the pre-Volcker world of the 1960s and 1970s, when high price rises seemed to be a fact of life.
Markets are probably right to accept that things are different and that rates will really rise this time. The much harder question is whether they’re right that things aren’t so different when it comes to inflation…
And finally, an old playbook relating TO global financial conditions, this from El-Erian earlier today,
When Will Monetary Tightening Hit Financial Conditions?
A disconnect increases the risk of a policy mistake and undue damage to livelihoods.
… While interest rates have started to move higher, this notable change in monetary policy has not yet led to a significant tightening in overall financial conditions. Consequently, the real economy has not yet felt any contractionary impulses, markets have been relatively sanguine, and developing countries have experienced few disruptive spillovers …
… Almost regardless of the reason, the disconnect undermines the likelihood of a timely and orderly adjustment, thereby increasing the risk of a policy mistake and undue damage to livelihoods. To assess this over the next few weeks and months, we would be well advised to:
Look more to developments in fixed income than in stocks to assess the degree to which financial conditions have started to tighten.
Focus on changes in yields on shorter-term bonds (up to five years) as reflective of effective policy expectations more than longer-term ones, which are influenced by a much bigger set of factors.
Recognize that the economic impact will take time and is likely to lag financial market developments.
Appreciate that the adverse implications for developing countries are more front-loaded, especially when (not if) the flow of capital to them reverses in earnest.
When some talk about the possibility of a new conundrum, it is important to recognize that the longer the disconnect persists, the more it may narrow what is already a small window for an orderly policy, market and economic adjustment …
Finally, on this day in 2004,
The Howard Dean scream (via History.com) or,
Have a great start and get those bids in for 20s early and often!