while we slept; toppin' 10s
Good morning … here is a snapshot OF USTs as of 810a (hey, it’s my day off…):
… HERE is what another shop says be behind the o/n price action, you know,
… WHILE YOU SLEPT
Treasuries are higher and the curve flatter this morning after some EU regions reported small CPI beats, leading to modest EGB outperformance so far. DXY is lower (-0.3%) while front WTI futures are too (-2.3%). Asian stocks were mostly higher (China modestly lower), EU and UK share markets are all in the green (SX5E +1.5%) while ES futures are showing +0.8% here at 7am. Our overnight US rates flows saw a more muted Asian session with on-balance buying from real$ and credit hedgers noted (concentrated in 7's to 30's). Our London desk reports muted flows too with net better selling with Spanish inflation above 10% still, despite coming in below expectations. Overnight Treasury volume was ~125% of average overall with 3yrs (243%) seeing some elevated turnover while 20's (40%) and 30's (72%) saw relatively little this morning.…… we show Treasury 10yr yields smack in the middle of their month's long range that we have roughly observed at 2.71% to 3.50%. Indeed, there seems to be a local support emerging again near 3.124%- similar to the level that contained the sell-off back in May.
… and for some MORE of the news you can use » IGMs Press Picks for today (30 Aug) to help weed thru the noise (some of which can be found over here at Finviz).
Just a couple things of interest from Global Wall St inbox I’m still running as I’m off again today … First up are are a couple from BBG with this one on rate CUTS
The fallout of Jerome Powell's hawkish Jackson Hole speech continues to ripple through financial markets with the surprising exception of Eurodollar bets on rate cuts next year. While expectations for monetary easing have clearly been pared, all of the damage was done before the Fed chair spoke. On Monday last week, a gauge of implied rate moves had wiped out all expectations of a cut in the first half of 2023, but they have edged back by a couple of basis points since and were unaffected by the speech itself. The same pattern can be seen in bets for the second half where market pricing for around 35 basis points of cuts has been pretty steady for a week and a half now. That's even as Treasury yields climbed in the aftermath of Powell's unequivocally hawkish remarks. The moves point to continued concern among investors that Fed hikes will do enough damage to the US economy to trigger an abrupt shift in policy. They suggest traders still remember that despite the Powell’s hawkish convictions, he has shown form in pivoting in the past.
And possibly WHY Mr. Market continues to think in this way,
Just in case the outlook wasn’t already rough for stocks and bonds in the wake of Jackson Hole, the Federal Reserve has another card up its sleeve for investors to worry about. Quantitative tightening — the trimming of the central bank’s $9 trillion balance sheet — will ramp up this week as the Fed boosts the pace to $95 billion a month. That’s fast enough that the Fed will start to let its T-bill holdings shrink, something that will be a boon initially for money-market funds as they’ve been struggling to find sufficient short-term assets. Further down the track it could end up driving funding costs higher.
More broadly it should add to the angst for risk assets, even if loud rate hikes have captured all the attention so far. Fed officials and others tend to downplay QT’s impact, but given that the initial quantitative easing was very much aimed at loosening financial conditions, putting it into reverse has to be expected to make things tougher.
Finally, from a rather large French bank comes the now well trodden path of,
Fed Chair Jerome Powell’s Jackson Hole speech reinforces our view that the 10y UST may have peaked at 3.5% in mid-June and is set to continue range trading.
We express this view through a modified covered call, where we receive the 6m10y SOFR swap, and sell a 6m10y ATMF −50bp receiver at twice the notional.
The reasons to go long US 10y rates include our lower-for-longer fed funds rate forecast, slowing US economic growth and the current market positioning.
Trade idea: Receive 6m10y SOFR swap, sell 6m10y ATMF −50bp receiver at 115c. Entry …
… PRISM has captured fluctuations in yields since the 10y UST yield peaked in mid-June (see Fig. 2 overleaf). More extreme short readings foreshadowed a fall in yields and more neutral readings foretold a reversal to higher yields.
With shorts increasing in our PRISM index to -21, 10y yields may be susceptible to a move lower from the top end of the range evident since late June towards the bottom of the range if short covering were to return.
Both economic fundamentals and positioning strengthen our view that the 10y UST may have peaked at 3.5% in mid-June and is set to continue trading in a lower range…
To be clear, shorts BUILDING and inflation impacting CONSUMPTION and choices, I firmly DISAGREE with the idea that negative real wages will NOT squeeze demand.
And if there were any questions remaining, this past weeks JHOLE confab clearly was a releasing of the hawks, globally …
… THAT is all for now. Off to enjoy my last day OFF before returning TO the day job…