while we slept; the 'End of an Era?'; a higher peak
Good morning.
Ahead of this mornings sure-to-be historic CPI report which then sets the table for this afternoons liquidity event (aka 10yr auction), there is little room (and time) for narrative creation.
As the market prices in some sort of concession for duration supply, here are bond PRICES as of 709a …
… And here’s how another shop defines the price action overnight
WHILE WE SLEPT
Treasuries are mixed and well off their overnight lows (a big Aussie 10y syndication weighed) as the curve pivots marginally flatter ahead of CPI and Brainard's WSJ discussion. DXY is higher (+0.15%) while front WTI futures have rebounded smartly (+3.9%). Asian stocks where mixed (Chinese exchanges higher, others lower), EU and UK share markets are mixed/lower while ES futures are showing +0.1% here at 6:45am. Our overnight US rates flows saw syndication-related hedge activity during Asian hours that would later shift to better buying ahead of London's open. Today's desk flows were much lighter than yesterday's, however. Overnight Treasury volume was still decent at ~135% of average.
… and for some MORE of the news you can use, head TO Harkster.com … Knowledge without the noise (and if its ALL the noise and links you like, Finviz).
Here are a FEW things which caught my eyes over the past 24hrs … First the interplay between stocks and bonds, via KIMBLE:
Rare To See Stocks Down and Junk Bonds Out-Performing Treasuries!
And since we’re looking at charts, THIS ONE from Bloomberg struck me much closer to home …
This year's seismic shift in the bond market has the look of a regime change and the last line of defense for the purists has now been reached. Benchmark Treasury yields have climbed to test their four-decade downtrend using a logarithmic scale, a more appropriate measure given the timespan involved. They rose above 2.80% in early trading Tuesday and need to close above 2.83% to mark the moment, based on my calculations. And a push toward 3% -- the whisper target for many investors now -- would seal the deal. Of course if you're an investor in Treasuries, you don't care what the purists think, you're more concerned with managing the worst losses in decades this year. A Bloomberg total return gauge of the securities has slumped almost 8%, set for the worst decline -- by a country mile -- since at least 1974. Still, a Treasury bond yielded 3% for the first time in three years on Monday -- the 20-year note. That could tempt some long-lost buyers out of the woodwork. And investors still see 10-year Treasuries finishing the year at 2.70%, suggesting we have reached dip-buying levels, according to a survey by Bloomberg.
Loving me some LOG VISUALS (thanks to a friend for pointing a few others out!).
With THOSE visuals in mind, here are a set of somewhat MORE intricate GLOBAL yield charts. A spotlight, if you will, from 1stBOS
Global Rates Spotlight: A higher peak
* Global Bond Yields have surged higher over the past week, in line with our medium-term bearish view on government bonds, with a number of key levels broken, which suggests the peak in yields will be at a higher level than we were previously expecting.
* Most notably, the 10yr US Bond Yield has posted a weekly close above the top of it’s long-term downward trend channel and more importantly, above the 200-month moving average. Furthermore, there is no sign of momentum slowing and we therefore believe that a move to the psychologically important 3.00% level is likely and then the “measured objective” to the multi-year “head and shoulders” base at 3.21/26%.
* From a secular perspective, it is increasingly clear that the technicals are signaling that the multi-decade bond bull market is over following this break of the 200-month moving average.
* However, this doesn’t necessarily mean we are about to enter a secular yield uptrend. Instead, we expect a continuation of the broadening mean-reverting range that we have seen over the past decade, during which time we have seen unsustained long-term breakouts to both the upside and the downside.
* In line with our Key Themes for 2022, we still expect normalizing monetary policy will mean that Real Yields continue driving the move higher in nominal yields and we move our core objective for the 10yr Real Yield from -.04% to now look for a move to at least .245/25%. If US Breakeven Inflation Expectations top out, there is significantly further upside potential for 10yr Real Yields beyond .245/25% in our view.
* Longer-term 5y5y treasury fwd rates have met and exceeded our core objective at 2.68%, breaking above a series of important long-term supports in the process. This suggests there is further upside and we now target a move to 3.20%, which is a long-term retracement level.
* We also re-evaluate our core objectives across the US Curve in response to the latest breakouts above key support levels and believe the 2yr and 5yr US Bond Yields will now break above their 2018 highs.
* The US 2s10s Bond Curve has steepened sharply over the past week, however we believe this will be a corrective move higher. With this in mind, we believe the 55-day average at 33.5/35bps is an attractive area to fade the recent steepening, with scope for the curve to move more heavily into inversion in our view.
* We still look for the US to underperform, which has been reinforced by the breakout in the 10yr US/Germany Bond Yield Spread above 193/94.5bps, which should open up a move to our long-held objective at 212bps.
* However, European Fixed Income markets are also moving higher, with German 10yr Bond Yields already above their 2018 high at .805%. As per our Q2 outlook, the next supports above here are seen at .915%, then 1.055%.
* Finally, the 10yr UK Bond Yield has also unexpectedly broken out above it’s 2018 high at 1.75%. Nevertheless, we still look for the UK to outperform on a cross-market basis and therefore see scope for limited follow-through, with next supports at 1.93/935%, then 2.00%.
CPI, 10yy and then bonds tomorrow … lots of ground to cover in a holiday shortened week. But THAT is all for now. Back TO the day job!!