while we slept; "Do bond markets know more than economists? (no)"; global bond losses this year > all of 1999 (record)
Good morning.
Here’s an hour, few days view of the long bond as of 615a …
Here’s an updated snapshot of on run USTs as of 725a
And while I’m not 100% sure what happened around 2a knocking long bond yields down off o/n highs of approx 2.64% but here’s what they are saying happened,
Treasuries are lower and the curve flatter- but prices are well off their move lows seen just before 2am (NY time) this morning. DXY is higher (+0.3%) while front WTI futures are down sharply (-4.8%). Asian stocks were mixed, EU and UK share markets are all higher (SX5E +1.8%, SX7E +2.9%) while ES futures are showing little changed (+0.1%) here at 7:15am. Our overnight US rates flows saw much better selling, focused on the long-end, from real$ and fast$ names during Asian hours. During London's AM hours we saw 'capitulation' in the front end (2yrs +12bp at London open) though client turnover was limited even though screen/exhange volumes were high. Overnight Treasury volume was ~145% of average overall with the biggest turnover seen in the belly and intermediates rather than the wings (2's at 112% and 30's at 103%).
… Next up is a look at Treasury 5yrs and how there is little in the way of [horizontal] support between spot levels and ~3.00%. Even more interesting is the next chart- an update of the quarterly chart of 5's sent around last week. As you can see, 5y yields have now taken out one version of their secular bull trendline- looking likely to have this break of the secular bull channel confirmed at Thursday's close. Note too that in the lower panel, quarterly momentum guides strongly bearishly where A) a multi-year bear market appears to be in its earliest innings and B) the 2018 move highs in yields are likely to eventually be taken out amid these very bearish 'prevailing winds.' Our next chart is a similar look at the quarterly chart of Treasury 10yrs- capturing a few different versions of its secular bull channel that we've drawn in. As you can see, 10's are just beginning to flirt with a topside, bull channel breakout now too... Bottom line: Thursday's close could confirm that the secular bull trend in bonds has officially reversed.
Thanks to the curve flattening, things are not quite as dire in 30yrs where nearby support levels have been respected so far. Our next attachment is a look at the weekly chart of 30's to zero in on that horizontal support at ~2.664% from the summer of 2019 trade. Additionally, our next attachment zooms out to the monthly chart of 30yrs and how its primary bull trend comes in near 2.88% right now, as illustrated. Monthly momentum is bearish again (lower panel)- a hint that 2.664% and then 2.88% might each be tested in the weeks ahead?
… and for some MORE of the news you can use » IGMs Press Picks for today (28 March) to help weed thru the noise (some of which can be found over here at Finviz).
Here are 2yy and 5yy (daily) as both are up for sale today
A few MORE things which I’m gonna try to read through and grasp (in addition to what was noted yesterday HERE — including a visual of 10yy back TO 1900):
A very early a.m. READ from a large German bank,
The dam finally broke last week with yields rocketing up as markets woke up to the reality that every upcoming FOMC meeting could bring a 50bps hike. An array of Fed speakers during the week either endorsed this or didn't rail against it too strongly.
This move has continued this morning with some big yield increases for an Asian session. US 2yr yields are +9.5bps and 10yrs +5.1bps to 2.52%, flattening 2s10s to 15.6bps. The 5s30s yield curve has inverted for the first time since 2006.
This follows last week's big moves where 2yr treasury yields gained +33.3bps over the week, predominantly in two large chunks on Monday (+17.9bps) around Powell's speech and on Friday (+13.5bps). This was the largest weekly advance in 2yr yields since June 2009. Markets increased the odds of a 50bp rate hike in May to 77%, while total tightening for the year increased to 239bps, up from 200bps the week before. 10yr yields modestly lagged the short end move, climbing +32.4bps (+10.1bps Friday), which sent the 2s10s yield curve to its flattest level since February 2020, closing the week at +19.7bps but hitting +13.8bp on Tuesday. The 5s30s yield curve which has inverted this morning declined -23.8bps (-10.1bps Friday) on the week. European sovereign yields also moved higher, with 10yr bunds, gilts, and OATs increasing +21.4bps (+5.5bps Friday), +19.8bps (+4.9bps Friday), and +18.6bps (+3.3bps Friday), respectively.
Given just how far the Fed is behind the curve it's fair to say that if the post GFC cycle could be erased from people's memory banks, then I think markets might be pricing 300-400bps of hikes this year. However the fact that the last decade was so moribund from an activity and inflation point of view means that markets still refuse to believe the Fed can get very far. The market is collectively anchored to the trends of the last cycle. Remember that before the FOMC 9 months ago in June 2021 the Fed and the market were hardly pricing in any rate moves until 2024, and only 3 hikes at the start of this year. Overall there has been a constant misunderstanding of this cycle which is totally different to the last. Clearly this is changing but the 240bps plus of total hikes now priced in for 2023 still isn’t a big year of tightening historically.
Asian equity markets are mostly weaker this morning on the back of Covid concerns in Shanghai as the city with 26 million people goes into semi-lockdown from today. The Nikkei (-0.58%) is lagging despite the Japanese yen resuming its slide after the BOJ intervened in bond markets with two offers to buy unlimited 10yr JGBs at 0.25% to defend its yield cap.
(Everyone’s favorite bear) MS on STONKS,
Markets priced for tighter Fed but not for growth risks
With the Fed's hawkish pivot, the first part half of our long standing narrative of Fire and Ice has played out. However, the headwinds to growth from this policy shift, still historically high inflation, payback in demand, and the war in Ukraine are not priced. Downgrading Financials to Neutral.Downgrading Financials to Neutral
MSs economics dept reminds us to: Expect the Unexpected
Chair Powell's remarks at NABE this week suggest he is closer to the views expressed by Governor Waller in favor of front-loading one or more 50bp hikes this year. As in 1994, expect the unexpected when it comes to how aggressively the Fed will move, then course-correct on a dime if needed.
UBS asks / answers: Do bond markets know more than economists? (no)
US five-year bond yields are higher than US 30-year bond yields, meaning part of the yield curve has inverted. Do bond markets know something economists do not, signaling a recession is now inevitable? No. Inversions signaled recessions in the 1970s, when bond yields were mainly about inflation. Inflation was tied to the cycle, and recession expectations meant lower long yields. Fifty years later, things are very different. Many countries have inverted yield curves without having recessions.
Ukraine and Russia will hold face-to-face peace talks in Turkey this week; Ukraine is signaling a possible referendum on neutrality. Armchair generals have become more skeptical about peace talks, and risk assets have not really responded.
Armchair virologists have new COVID-19 measures in the Chinese city of Shanghai. Half the city will undergo testing this week, half next week. The media has rushed to declare “lockdown”, which unfortunately conjures memories of 2020—this is nothing like 2020. Similar measures elsewhere in China have allowed businesses to continue operating within bubbles…
Hedgopia: VIX At 200-DMA, While S&P 500 Enjoys Strong 2-Week Rallies To End On Golden Ratio
… This is taking place at a time when rates have jumped big. The signal being telegraphed by the Eccles Building has gotten decidedly hawkish. The two-year treasury yield, which tends to closely track the Federal Reserve’s monetary policy, has gone up 100 basis points just this month alone – from 1.31 percent on the 1st to last Friday’s 2.30 percent. The 10-year yield went from 1.72 percent to 2.48 percent between the periods. As a result, the spread between the two shrunk from 41 basis points to 18 basis points. The red line in Chart 4 is nearing inversion. Historically, this has tended to precede contraction in the economy.
However, the 10-year’s spread with three-month bills has gone the other way from the start of the month – from 140 basis points to 193 basis points. The bond market is not completely sold to the idea of an imminent recession – not yet anyway.
The Fed is front and center. The hawkish meter has shot up since this month’s FOMC meeting (15-16) and particularly since last Monday when Jerome Powell, Fed chair, declared “inflation is much too high.”
At this month’s meeting, the fed funds rate was raised by 25 basis points; the Fed also said it would announce a plan to shrink its $9-trillion balance sheet in the next meeting, which falls on May 3-4; the dot plot signaled six more hikes this year – essentially one each in the remaining six scheduled meetings – but no 50-basis-point hike was signaled. This changed last Monday when Powell said that the central bank, if necessary, would be open to raising rates by a half-point at multiple FOMC meetings.
They are trying to catch up. Inflation is running rampant, with both the consumer price index and the personal consumption expenditures at four-decade highs. Chart 4 plots the fed funds rate with the misery index and it is evident the Fed left rates suppressed for far too long.
The misery index combines the unemployment to the inflation rate. The former in February was 3.8 percent – a two-year low – and the latter 7.9 percent, which was the highest since January 1982.
Given the shift in Powell’s tone, he may very well tighten until the economy contracts. Said it the other way, inflation may force his hand to do so. Equities, on the other hand, are beginning to bet on a soft-landing…
Finally, from BBG — and on heels of what I mentioned yesterday — while the next few days may seem like an eternity, there may be some (counter balancing)forces at work with month, quarter and fiscal year end (Japan) to consider while reading things like THIS,
Officials scramble to temper Biden’s Putin remarks. Shanghai plans massive Covid lockdown. Australia to start winding back pandemic stimulus. Here’s what you need to know today…
Global bonds continue to tumble into uncharted territory. Bloomberg’s gauge of the securities has lost 7.1% so far this year. That’s a special kind of unprecedented hell for investors in what, theoretically, should be the safest of assets. Not only does that exceed 1999’s 5.2% loss, which stands as the current record for a full-year decline, it also has the Bloomberg Global Aggregate Index set for the first back-to-back annual losses since its inception in 1990.
The difficulty that investors now face is how to gauge where the bottom could be for bonds. On the one hand, the historic level of these losses would suggest that the selloff should soon lose momentum at the very least. On the other hand, inflation shows little sign of peaking and bonds had also reached unprecedented heights thanks to the epic central bank stimulus deployed amid the pandemic. Buying this particular dip is a very bold call indeed, especially with yields still relatively low on a historical basis and substantially negative on an inflation-adjusted basis.
With this global bond bear in full force ahead of Japans FY end (coinciding nicely with month and quarters end here, too), this
ZH: "The Move Is A Big Deal" - Yen Tumbles After BOJ Intervenes To Cap JGB Yields Amid Global Selloff
… On Monday morning, one day after the BOJ left many stunned with its refusal to announce an open-ended bond market intervention as yields spiked, the central bank changed its mind and conceded that it was not willing to risk a bond market collapse, announcing that it will purchase an unlimited amount of 10-year bonds at a fixed rate of 0.25%.
The decision comes as interest-rate hikes by major peers such as the Federal Reserve have sent yields across the globe soaring, adding upward pressure on Japan yields. The 10-year yield stood at 0.242% at 10:23 a.m. in Tokyo, compared to a tolerated level by the BOJ of 0.25% under its yield-curve control policy.
And while JGB yields will remain at or below 0.25% (for now) courtesy of the BOJ's verbal intervention which however failed to actually prompt any actual trades...
*BOJ SAYS NO BIDS TENDERED FOR FIXED-RATE BOND-BUYING OFFER
… and THAT’s all for now. Off to the day job…