while we slept; 'Earl; DEMAND in full force as USTs set for one of the worst returns since 1931, the Civil War and the 1980s;
Good morning and welcome TO the last day of Q1 (and FY in Japan). I’ll try and be brief.
Where things settle today will be slightly more interesting than where things settle tomorrow, at weeks end, AFTER NFP.
I’ll likely refer back TO (3 TLINES worth 1000 words) over the coming weekend.
For now, though, news of Biden’s SPR plans have hit ‘Earl dramatically and perhaps we should slow walk that next trip TO Costco Gas,
Reuters: Oil prices dive as U.S. considers record reserves release
And while I’d LIKE to focus on the highlighted area,
MATH: Lower ‘Earl = lower ‘flation = positive for LONG BOND PRICE = tax CUT for consumers = GOOD for growth / economy BUT … the volatility should and will NOT go unmentioned. We’ve seen this movie before. Perhaps we shouldn’t wait to fill up the tanks??
SIDEBAR … on lower ‘flation and being good for long bond prices, a chart from a large German bank just hit and it seems that high / rising ‘Earl (generally speaking) hasn’t really HIT DEMAND,
Long end demand in full force
… Fund flow data aggregated by EPFR highlight a ramp-up in demand for US government bonds since H2 2021 most noticeably in the long end. Flows into long-term government bond funds reached the highest level in Q4 last year and could potentially surpass that record in the current quarter with $10.3bn in cumulative inflow as of last Wednesday (vs $11bn in Q4 2021).
The rapid rebound in equities from local lows as well as further sell-off in rates since the publication of Q4 Pension Update roughly two weeks ago warrant a reassessment of model implied pension demand. This price action incentivized further de-risking, which we now estimate to be $61.8bn (fixed income inflow) in the first quarter.
Meanwhile, overnight data in China having moderated due to Omicron - the economic cognoscenti says,
Barclays: NBS PMI moderates amid Omicron outbreak
Goldilocks: Official manufacturing PMI fell in March due to worsening Covid situation
NatWEST: China PMI: The worst is yet to come … Overall March official PMI data partially reflected the impact of the latest round of covid outbreak in China, which has been hurting economic activities harder than expected. The latest disruptions caused by lockdown in Shanghai since 28th March have not been fully captured in March survey. We think the downward pressures will remain in the short term and expect stronger easing policies to be rolled out timely to offset some downside pressures. The easing measures will likely focus on targeted credit easing policies and faster implementation of fiscal easing.
… to say ‘it’ ain’t over and the fat lady hasn’t yet begun to warm up, well, would be an understatement of epic proportions. To say a bunch more before days end and tomorrows NFP would ALSO be a mistake.
The good news the other day in Russia / Ukraine has so far, turned out to be a non-starter and was / is being trumped by month/quarter (and FY in Japan) end flows.
To say it was an ugly quarter for USTs would be an understatement. More on just HOW ugly in a moment.
First, here is a snapshot of UST rates, prices and moves as of 742a
… And HERE is what another shop says be behind the price action, you know,
WHILE YOU SLEPT
The Treasury curve has pivoted steeper and richer on decent ~110% volume, core FI markets looking past regional inflation beats (Germany yday, France today) towards Crude Oil (-6%) today on a report that the US is planning a historic release from the SPR to combat high gasoline prices. Flow-wise, our futures colleagues point to sociable TY buying from real$ types, in addition to cash flatteners. Little indication of month-end rebalancing demand afoot. 5s30s +3bps steeper, DXY +0.4%, while S&P futures are -1pt here at 7:15am.
For MORE — hot off the presses from best in the biz,
… Overnight Flows
Treasuries were modestly higher with the belly of the curve leading the bid. Overnight volumes were near the norms with cash trading at 105% of the 10-day moving-average. 5s were the most active issue, in keeping with the sector’s outperformance, taking a 36% marketshare. 10s managed a more pedestrian 23%. In the front-end of the curve, 2s and 3s combined to take 28% at 13% and 15%, respectively. 7s took 9%, 20s 2%, and 30s just 3%. We’ve seen light buying in 3s and 10s.
… and for some MORE of the news you can use » IGMs Press Picks for today (31 March) to help weed thru the noise (some of which can be found over here at Finviz).
Now in as far as just how ugly a quarter for USTs it was, DBs early morning READ author put it best with this visual sent ‘round yesterday (before HIS 2wk hol)
One of the worst quarters for Treasuries on record
… Q1 is set to be the worst quarter for our 10yr UST series since the early 1980s. Indeed, since the US Civil War, 10yr US Treasuries (or equivalents) have only seen a worst total return quarter in the early 1980s and in Q4 1931 after we passed the peak of the Depression based rally.
That’s BAD and as bad as it may be, John Authers earlier this morning offered some further context
…For now, the effect of a drastic inflation shock has been to force down the price of bonds. German two-year bunds now have a yield of just under 0.01% — and if that doesn’t sound much, it’s the first time they’ve turned positive since 2014. The speed with which German yields have adjusted has been brutally fast and might easily cause disruption:
That has led to double-figure percentage losses for European bonds so far this year, according to the Bloomberg aggregates. Bonds have been in trouble everywhere, of course. But the fall in Europe, with an inflation shock to be added to the fiscal shock that will presumably come from increased war spending, has been of a different order:
Since I was on BBG.com, I thought I’d end with a few thoughts and things on Joe’s mind from this mornings
5 Things To Start Your Day: Strategic oil reserves, Apple chips and inflation running hot.
The yield curve is close to an inversion, and of course people are debating whether it's a sign of a recession in not-too-distant future. Others, of course, dismiss the signal, and think it's track record is dubious, and the theory is unsound. So what's the yield curve inversion all about? And why should it be taken seriously? Here's three things to consider.
1) The first thing is simple. Here's a chart you've no doubt seen tons of times in recent days. It shows that when the 2-10 spread turns negative (which means that when the yield on two year government bonds is higher than the yield on 10-year government bonds, a recession (shaded in red) seems to follow.Even if you didn't know what the 2-10 spread was, or you had no idea why it was a thing, just based on history alone, you'd look at that chart and say, hey, when this things drops below zero, recessions seem to happen. So it'd be weird to be too dismissive of it, now that it's so close to the line.
2) Ok. What about the theory…… So bottom line, when it comes to the yield curve, it has a decent history of forshadowing recessions. There's sound theory for why an inversion signals recession, and even though the economy is growing rapidly, there are certainly some headwinds. As such, it's worth taking a potential inversion seriously if it does occur on any kind of sustained basis.
And if THAT doesn’t make you feel somewhat more educated and better (or less bad) then here’s something I stumbled across on twitter
… THAT is all for now. Off to the day job…