while we slept; RBA goes 50bp; higher rates = 'yield support'; updated GSCPI; "The end of the ultra-low default world?"
Good morning … You’ll note this ( from IGMs Press Picks) which happened overnight,
Biggest one-month lift in interest rates for 22 years – Sydney Morning Herald RBA governor Philip Lowe said the 0.5 percentage point move was driven by current inflation pressures and very low interest rates. “The board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.”
Anyone, anywhere left to bid on front-end USTs — 3yy DAILY looking overSOLD, watching 3.016%
Stocks offered — helping — technically oversold, too. DB notes,
Treasury will sell $44bn 3yr notes at 1:00pm today, $1bn less than the May auction. Fed SOMA add-on will raise the total issuance size by $2.59bn.
Three-year yields have risen ~13bp since the last auction stop-out level and are currently trading at about 2.94%. The 2s/3s/5s butterfly has tended to increase coming out of recent 3yr note auctions.
End-user demand rose to a record high of 80.0% in May as indirect participation increased to 62.0% from 53.4% in the previous month. Direct bidders participation remained strong (18.0% vs. 17.5% 12m average)…
In other NOT (directly) liquidity event (aka auction) OR rate-hike related news, here is an updated look at the FRBNYs Global Supply Chain Pressure Index (GSCPI)
It was introduced back in January (?) and the good news is that it DECLINED a touch in May. “The GSCPI compiles more than two dozen metrics across seven economies—data on global transportation costs and regional manufacturing conditions—to track shifts in supply chain pressures from 1997 to the present…”
For MORE, click HERE… here is a snapshot OF USTs as of 722a:
… HERE is what another shop says be behind the price action, in a morning commentary titled, Catchin' Up is Hard to Do,
Overnight Flows
Treasuries found modest support during the overnight session. Flows were elevated with cash trading at 135% of the 10-day moving-average. 10s were the most active issue, taking a 35% marketshare while 5s were a distant second at 24%. 2s and 3s combined to take 23% at 12% and 11%, respectively. 7s managed 12%, 20s 2%, and 30s 4%. We’ve seen buying in the 5-year sector and the long end.
… and for some MORE of the news you can use » IGMs Press Picks for today (7 June) to help weed thru the noise (some of which can be found over here at Finviz).
Meanwhile, in other news (and sellside VIEWS) which get / keep me thinking about the state of things as they all and always relate TO the rates market, such as this from DBs Jim Reid
The end of the ultra-low default world?
… This year’s study finds us back at the lows for defaults with the Covid default cycle now behind us. This was the shallowest and narrowest default cycle in the leverage finance era which was understandable given the extreme intervention seen. This continues a structural trend lower in corporate defaults over the last 20 years. In this year’s study, we explain why we think the next default cycle will follow the US recession of late 2023, and why, after that, defaults will start to structurally move higher again in contrast to the past two decades…
…For now, it’s fair to say that on a spot basis, real government and IG credit yields are still all deeply negative. Even spot single-Bs real yields are negative which is remarkable given the credit risk investors are taking on. In the late 1990s, they averaged in the high positive single digits.
So continued historically low real yields have been a big part of our long standing view that we are in a low default world. However, from here we think its gets more complicated. The sweet spot for low defaults was probably the combination of low/ negative real government yields and low inflation that we are likely leaving behind…
So if low default rates are to become somewhat less low, that would then imply — at least to MY read — a higher default rate = less good for owning corp bonds and riskier assets generally speaking SO … USTs set to come back en vogue like my velvet tracksuits?
And that would then mean today’s HIGHER YIELDS are trying to define some sort of opportunity. DIPportunity? One other way to consider today’s higher yields is to think of some GOOD news about higher official rates — they will offer ‘yield support’ — so says, Goldilocks,
The firm concludes,
… A true “top” in yields for this cycle, in our view, is likely to occur only when it is clearer that a pause/end to the hiking cycle is nearing. Until then, expectations for continuing policy normalization will likely serve to substantially moderate the extent of any yield declines in a period of slowing growth…
OR we’re simply RANGEBOUND, defined as such —
Barclays: Global Macro Thoughts: Bouncing back and forth
China’s re-opening and the US jobs report were both positives last week, but countered by high Euro Zone inflation and a new oil embargo. With all eyes on the US CPI report, risk assets are likely to bounce back and forth this week, without breaking in either direction.
Here’s one from the CHARTS department — important look @ BUNDS ahead of this weeks ECB (and for any/all of us who know that German yields are inseparable from UST yields). 1stBOS:
Chart of the Day: 10yr German Bond Yields have continued higher since our last report, where we suggested the market was likely to break out above key long-term supports between 1.19/20% and 1.235/25% and move towards the next major support area at 1.49/505%. The market has now closed the latter of these key long-term supports and with short-term momentum surging higher again, we believe the path is clear for a relatively direct move up to 1.49/505%, with the ECB meeting a clear catalyst this week.
Consequently, you’ll ALSO note firm staying tactically BEARISH BONDS (3.025% stop) as well as turning bearish 10yy @ 2.84% …
Here’s another one from the CHARTS department
Hey it’s not only BONDS which are having NO FUN these days … as if you needed that at reminder!
And speaking of ugly reminders, the latest from Goldilocks who’s weighing in to jack its Earl f’cassts
And one for the rates guys / gals inner stock jockey, Barclays,
U.S. Equity Strategy: The Cash Burning Question
Corporates and households are beginning to burn through cash hoards which we previously identified as a key source of support. Buybacks have increased to record levels, even as debt issuance remains tepid. Elevated inflation is eating away at household savings accumulated from fiscal stimulus and low services spending.… In terms of the uses of this cash, the most significant recent change has been the significant increase in buybacks with a ~40% uptick since 3Q21. As a result, nominal buybacks continue to make new all-time highs (Figure 4), while buyback yields have jumped back inline with the 2015 - 2019 median (~2.8% annualized).
In contrast, Net Capex normalized by CFO is still well below pre-pandemic levels (Figure 5), even though nominal values have just return to pre-pandemic levels. The muted level of normalized Net Capex is not particularly surprising given that supply chain pressure remains high. If companies cannot even reach full capacity of operations due to difficulty sourcing raw materials and other inputs, it doesn't really make much sense to spend more on capex.
…One potential explanation for the continued increase in buybacks is that companies view their stocks as being cheap and are buying the dip. However, when the market had large drawdowns in 2008 and 2020, companies tended to buy back less stock (Figure 6), most likely in an effort to conserve cash. In our view, if companies continue to spend down their cash reserve to increase buybacks then tighter financial conditions will be a much stronger headwind than we previously assumed.
Finally, the latest polling results are IN — clearly I was counted, were you?
(h/t the burning platform)
Then there’s this
… THAT is all for now. Off to the day job…