while we slept; 'growth OR inflation?'; BoJ FAILS to launch (more bond buying); return of THE widow maker; (bond)bears beware
Good morning.
The empty suits have apparently ‘struck a deal’ for natty (CNBC) and UST yields ticking higher as week comes to an end and ‘investors monitor developments in Ukraine, mon pol’ (CNBC). RTRS ‘morning bid: inflation or growth?’ sets up the choice as a binary one which is NOT, best I reckon, how the Fed operates.
Weekly closes more interesting than daily ones (and monthly / quarterly more interesting than weekly) and here’s a weekly look at 30yy …
… where 2016 LOWS (2.10%) are resistance SHOULD the bond catch a bid but in the meanwhile, recent ‘cheaps’ and weekly close @ ~2.50% may garner loads of attention. With momentum stretched (so at risk of a bullish cross), I’ll watch the weekly close today as well as NEXT weeks monthly / QUARTERLY close, for further clues.
Here is a snapshot of UST rates, prices and moves as of 732a
HERE is what they are saying is behind overnight action,
WHILE YOU SLEPT
Treasuries are modestly flattening on 65-70% volumes, front-end weaker ahead of Monday’s double-auction but some long-end rebalance flow in play post-IFO data missing estimates in Germany. Energy prices have backed-off as well (CL -2%), while SPX futures are flattish here at 7am. FX markets are quiet outside of some retracement in USDJPY (-0.6%) and Russia (RUB +4%). Bund yields are -2.2bp backing off recent yield highs, Gilts -3.7bp too, while Eurozone peripherals are outperforming with 10y BTPs -4bps or so. 5s30s US curve is looking as fresh cycle flats currently, sub-12bps. Front FRA-OIS remains under pressure, -1.5bps to 1.7bps.… 2y yields, weekly: eyeing MAJOR support at ~2.30% (2018 range-lows), the secular bull trend support aligning from the 2000, 2007, and 2018 highs, with a move above opening up the possibility of a retest of the 2018 highs just below 3% over the medium-term.
For MORE, from large Canadian operation, a MORNING COMMENT
… Overnight Flows
Treasuries were marginally better overnight with the long end of the curve outperforming. 5s/30s dipped to fresh cycle lows at 11.1 bp. Overnight volumes were below the norm with cash trading at 69% of the 10-day moving-average. 10s were the most active issue, taking a 31% marketshare while 5s were a close second at 30%. 2s and 3s combined to take 21% at 12% and 9%, respectively. 7s managed 12%, 20s 1%, and 30s 5%….
… and for some MORE of the news you can use » IGMs Press Picks for today (25 March) to help weed thru the noise (some of which can be found over here at Finviz).
Jumping right in TO some things in Global Wall Street will be thinking about / reading this morning and which you may find of interest,
RTRS: Yen bounces as BoJ drags heels on bond buying
ZH: Historic Treasury Front-End Selloff Approaching Peak As 2Y Notes Trade Below "Fails Charge"
… The selloff after his remarks has exacerbated fault lines in the market, with the Bloomberg Treasury Index having declined 5.93% through Tuesday, making it the worst quarter for U.S. bonds in data going back to 1973. At the same time, the Bloomberg Global Bond Aggregate Index is suffering its biggest drawdown on record.
Historically, after such massive oversold liquidations, the subsequent move is a sharp reversal in flows as profit-taking begins; in this case profit-taking would be coupled with a record short squeeze. Meanwhile, with the war still raging in Europe Ram notes that there is still a possibility of systemic risk, an eruption of which may slow the Fed’s hand and send front-end yields much lower.
As the Bloomberg analyst concludes, "all told, front-end Treasuries seem closer to the last leg of the selloff that has been rippling through the markets for a few months now."
More on this idea of largest drawdown ever and keeping it in mind as we head in to not ONLY month end but also QTR end … in just a moment.
Specifically on front end — 5s, THIS from a large and well known FRENCH BANK
US Rates: 2s5s10s closed at 23bp
We closed our 2s5s10s UST butterfly (buy 5y) at 23bp as it decisively breached on our 22bp stop-win on 23 March.
The trade was initiated on 25 January to benefit from the cheapness of the belly of the curve versus the wings, and typical curve behaviour at the onset of lift-off.
The recent rise in rates has increased the peak in the Fed cycle to about 2.75% in mid-2023 and cheapened the 5y on the butterfly to the point where we have breached our amended stop level.
Entry: 34.5bp. Close: 23bp. Total P&L: +8.6bp (USD860,000) including -3bp carry.
And then there is this from Steve Major
Then there’s BBGS Weekly FIX offering a reminder of the dreaded and original ‘widow maker’ (being SHORT JGBs) trade…
… Return of the widow-maker
Kyle Bass may want to take a moment. If the recent speculation on the Bank of Japan’s policy is to be believed, shorting Japanese government bonds may actually start looking profitable. This trade, known in blokey investing circles as the widow-maker—for the ruins that have been made of betting against JGBs —hasn’t had such a decent run for years. The 10-year government bond hit its highest level since 2016 this week.That level, around 23 basis points, prompted the Bank of Japan to step in last month with offers to buy an unlimited amount of bonds at a fixed rate. At the time it squelched talk among traders that policy makers might be preparing to spool out the leash on this intensely controlled market.
So far there’s been no similar action from the central bank. And that’s rebooted speculation that the Bank of Japan may be prepared before long to loosen its target band for the benchmark. Policy makers are under increasing pressure as the benchmark yield gap to the U.S. widens, beyond 200 basis points, which is turbo-charging the greenback’s rise versus the yen.
A weak yen has been fortuitous for Japan’s export market, but a collapsing currency — it’s already around six-year lows — presents stability problems, and a setback to the economy via the drag on domestic consumption, particularly as inflation threatens to outpace wage growth.
“These developments suggest that the BoJ’s extraordinary monetary policy has become self-defeating as it cannot co-exist with the tightening of major central banks, especially that of the Fed,” wrote Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA.
She expects the BoJ to take action on its yield curve control policy, by expanding the band in which the 10-year JGB yield can fluctuate, raising the ceiling to 1% from the current 0.25%.
With this widow maker in mind, THIS from WFC seems appropriate
Where the research piece asks / answers ,
… Is it possible to pull off such a soft landing whereby the FOMC tightens monetary policy at a rapid pace, inflation comes down materially but economic growth and the labor market are largely unharmed? We believe the answer is yes, but possible and probable are two very different terms. The U.S. economy is currently in a vulnerable position. Although that does not make a recession inevitable, it does suggest that the odds of a contraction are elevated.
… That said, the risk of a recession further out looks materially higher in our view. Today's environment leads us to believe recession risks are unusually elevated; we put the odds of the U.S. economy contracting at some point between now and the end of 2023 at 30%. Our base case remains that the Fed tightens policy further over the next year or two without generating a recession. Admittedly, the path to economic growth settling nicely back to trend and unemployment being more or less unchanged is narrow and will require a number of dynamics around spending and supply factors unfolding in the Fed's favor. But economic outcomes exist across a spectrum. We see a significant likelihood that a technical recession is avoided, but growth slips below trend and the labor market treads water. That, however, may require living with above-target inflation somewhat longer if the FOMC re-weights its priorities as economic growth and the labor market look shakier.
… Given the lag with which monetary policy operates and the numerous headwinds facing the U.S. economy, it is not hard to envision a scenario where the FOMC makes a policy mistake. Inflation-adjusted, after-tax personal income has fallen for six straight months from August through January, the latest data available, due to fading fiscal stimulus and elevated inflation. Real household consumption growth has remained decent over this period due to rock-solid household balance sheets, but how long will consumers be willing to swim against this tide? Since January, the inflation outlook has worsened further and fiscal stimulus has faded further into the background. As a result, we expect real incomes to keep sliding in the near term (Figure 7).
… The magnitude of the impact from monetary policy tightening is hardly the only question mark. The timing of when the impact will be felt from higher rates is also uncertain. Financial markets are forward-looking, and as a result monetary policy tightening is already happening despite just one rate hike so far. Since October 1, the two-year Treasury note yield has risen by nearly 200 bps, and the yield on the 10-year Treasury note is up nearly 100 bps. The most recent Freddie Mac survey of mortgage lenders shows that the average 30-year fixed-rate mortgage is 4.4%, up from 3.0% in early October (Figure 8).
And there’s more. Nothing without consequence and to think somehow these things will somehow NOT impact the US consumer here, THIS TIME, well, strikes me as a rookie mistake.
Finally, as the week comes to a close, something which I saw on TWITTER (HERE) so it must be true — gave ME a reason to pause and absorb …
@charliebilello
US bonds are down 6.3% so far this year, on pace for their worst year in history (record is -2.9% in 1994).2:03 PM · Mar 24, 2022
Oh. Ok … And with Coach K back in the Elite 8, a bit of a basketball theme from investing.com ‘toon (Fed Chair Powell Hints At More Rate Hikes Amid Hawkish Shift in Policy)
JPOW and Coach K … I dunno ‘bout you but I do NOT see any likeness … and THAT’s all for now. Off to the day job…