while we slept; can TLT reverse higher from 'historic' oversold level? have bond yields PEAKED? (see H&S); yesterday's data WILL matter to The Fed
Good morning … New home sales COLLAPSE in April (ZH) and 2y auction was solid, stopping THRU despite ‘plunge in yields’ (ZH). The fear of too much Fed cowbell (hikes) drove demand for 2yr USTs? Can’t be…I’m sure all this a complete coincidence?
But wait … so we’ve gotta consider it a leap of faith in saying that with mortgage rates go UP as much and as quickly as they are , it matters?
That is what NEEL Ka$hkari said the other day …
Meanwhile, said another way by those we all hold so dearly … Global Wall St’s sellside,
GrantThornton: Rate Hikes Take a Toll. “Housing prices will not be providing the lift to household wealth they have in recent years.”
Wells: New Home Sales Plummet in April
Barclays: April plunge in new home sales will concern FOMC
(who’d a thunk it)
AND nothing would be complete without Goldilocks message to the minions and muppets,
CONCLUSION: nothing happens without a consequence…Ok then. Moving on,
… here is a snapshot OF USTs as of 705a:
… HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
USTs are mixed and modestly flatter on light activity (rolling activity started y'day). Two TYM2 buy blocks in Tokyo session (5k & 2k) kept rates underpinned despite modest risk-on tone in Asia equity complex (SHCOMP +1.2%, KOSPI +0.4%). As expected, the RBNZ hiked 50bps, but hawkishly increased their cash rate peak projection to 3.95% from 3.35%. The DXY is slightly higher (+0.4%), the EUR under-performing majors (-0.6%), while Crude is +1.4% and Copper is -1%. SPX futures are flat at 7am, 2s10s curve -3.5bps and the belly leading with 2s5s10s -1.8bps.
… and for some MORE of the news you can use » IGMs Press Picks for today (25 May) to help weed thru the noise (some of which can be found over here at Finviz).
Things (and LINKS) I’m thinking ‘bout and reading, from Global Wall Street. First, from the bowel of the charts department — quasi rates related,
KIMBLE: Can Treasury Bonds (TLT) Reverse Higher From Historic Oversold Level?
Here is a chart from John Authers’ latest (Has the Inflationary Wave Broken? Expect More)
… market technicians see signs that bond yields have formed a wave that has now peaked. I’ve advertised my skepticism about technical analysis, which often has a spurious precision. But really clear patterns that are popularly regarded as significant often become self-fulfilling prophecies. One of the most popular is the “head-and-shoulders” pattern — when a market makes a peak, dips, moves back to a higher peak, dips back to its original level, moves back up to the level it made during its first move upward, and then declines again. It’s held to represent a top or, if the head and shoulders belong to someone hanging upside down, a bottom. And the 10-year Treasury yield, the most important rate in the world of finance, looks very much as though it has just traced out a perfectly formed head and shoulders:
As the icing on the cake, the two shoulders occurred at the round number of 3%. Should we regard this as telling us anything important? No. Is there a chance that — regardless of its true importance — the algorithms, primed with technical data, will take this is an invitation to buy bonds again? Yes, there is. Even if you aren’t entranced by technical analysis, it’s certainly beginning to look as though yields are trending back down. That implies confidence that inflation will come under control without the need for the Fed to hike rates too often…
And HERE are 1stBOS weekly global macro charts where they note,
Looking across asset classes, the key takeaway is that most markets have settled into short-term ranges or entered corrective phases after reaching key technical inflection points. This makes sense in our view, as the monetary policy outlook is becoming clearer and it will take time now to assess the impact of the planned tightening. The USD, Bond Yields and more tentatively Equity markets have stabilised, however we expect the core trends in each of these markets to reassert themselves in due course. For the USD in particular, this could take some time now, with the DXY failing at the top of its typical extreme…
… whilst 10yr US Bond Yields drift lower as expected, with the market threatening a small “head and shoulders” top below 2.715%, which would trigger a corrective recovery. Like the USD though, we eventually expect yields to push on later on in the year and break the 2018 high at 3.26%
Putting the charts aside, a couple other items which may be of interest
DB offering one for those who don’t learn from history are, as they say, doomed to repeat it:
Investing during Stagflation: What happened in the 1970s
With growing fears that we’re heading for stagflation, investors are increasingly asking how they should be positioning for such an environment. Unfortunately, the headline takeaways from the 1970s are pretty bad – in real terms it was a terrible decade for equities and bonds across multiple countries. Whilst this decade is young, and the high inflation has only been around for just over a year so far, we can already see similar patterns between how different assets performed in the 1970s and how they’ve been doing today.
Equities generally saw losses in real terms in the 1970s, but energy was the best place to be on a sectoral basis, echoing 2022’s performance.
Treasuries declined in real return terms too, although those with shorter-dated yields fared relatively better than their longer-dated counterparts, once again mirroring the 2022 performance.
On an international basis there wasn’t much respite either. However, the countries who managed to see a positive real performance for equities or bonds over the decade tended to be those who were more successful at keeping inflation out of double digits. For bonds, this correlation between positive real returns and their ability to keep inflation down was very strong.
Precious metals were one of the best places to be in the 1970s, with gold and silver seeing strong real returns as they lived up to their reputation as an effective inflation hedge. Both have range traded over the last coupe of years though. Other commodities did very well in the 1970s, including oil and agricultural goods. That echoes what we’ve seen in 2022, where commodities are the only asset class to have seen relatively consistent gains this year. Elsewhere, property managed to maintain its value in real terms in an up and down 1970s.
Overall, the main takeaway should be that if inflation stays highs for many years, both history and today's high starting valuations suggest it will be very difficult to generate positive real returns in most traditional financial asset classes. Nominal returns will also likely notably underperform their long-term trend. Commodities could be the exception.
Traditional assets will need inflation to return back towards target in order to get back to long-term positive real returns. If not, then prepare for a decade of real wealth destruction after four decades of huge real wealth accumulation.
At the end we present a series of tables detailing the annual returns for those assets discussed in this piece, in both nominal and real terms.
LPL asks / answers: How Do Bonds Perform During and After Equity Bear Markets?
… if equities continue to decline, LPL Research believes the rapid rise in rates so far in 2022 will allow bonds to act as a better diversifier to equity volatility moving forward (discussed here). Additionally, if history is an indication of future performance and equities bottom soon, bonds may perform better the second half of 2022 and recover some of this year’s losses. This could be a good time for investors with a meaningful underweight to core bonds to reevaluate their allocations to the asset class.
Prometheus Research asks quite simply: What About Treasuries?
… iii. Treasuries should have a minimal portfolio position. Many market participants are now calling for a bounce in Treasuries; however, price dislocation by itself is not a signal. Through our systematic lenses, inflation dynamics create a challenging environment for Treasuries; weak growth supports higher Treasuries, the trend is negative for Treasuries, and regime expected returns are one standard deviation above the cross-sectional average of 50 assets we track. These dynamics do not present a strong signal. We expect Treasuries to be a strong performer in a tightening liquidity environment. Still, for our systems to start piling in, we need to see significant changes in the market trend. We wait and watch. Here’s our net exposure monitor for Treasuries & MBS:
Different strokes for different folks. USTs may not be for everyone ALL the time. Yesterday’s 2yr auction went well … unsure what this afternoons 5yr auction may bring as it comes just an hour before the FOMC minutes. Time, as they say, will tell.
… THAT is all for now. Off to the day job…