while we slept; 'what a bear market looks like' (BONDS lead stonks, 2s5s); what NEXT -DB; build it and they came (field of bond bull dreams, $TLT)
Good morning. Happy ding dong lows anniversary. On this day in 2020, S&P 2191.86 (just after 11a then nearly a retest of lows into CLOSE, next day GAPPED HIGHER). 10s were 54bps and 30s were all of 99bps. In as far as MUNIS go, HERE are a few words from AAM … Meanwhile, Stock futures slipped and yields hit highest since 2019 yesterday, after JPOWs NABE remarks … the dust continues to settle.
YESTERDAY I had a visual of equity INFLOWS and this morning I couldn’t help but point out ‘analysis’ like this regarding BONDS is often overlooked. Because, you know. They are bonds. Consider this visual … which I’ll come back to in a bit.
Build it (higher yields) and they’ll come (buyin’). In the meanwhile, here is a snapshot of UST rates, prices and moves as of 735a
And HERE is what another shop says be behind the price action, you know,
Treasuries are modestly higher and the curve modestly steeper after new move highs in yields (10's to 2.415% overnight according to BBG) were rejected. DXY is higher (+0.2%) while front WTI futures are too (+2.6%). Asian stocks were higher (Nikkei a leader at +3%), EU and UK share markets are mixed/lower while ES futures are showing -0.4% here at 7:10am. Our overnight US rates flows saw an active overnight session with our desks citing very good demand for bonds overnight- notably in the long-end from credit hedgers. In the very front end the recent flows have been more bifurcated with ongoing and solid demand for Bills (amid paydowns now) alongside persistent selling of off-the-run coupons. Overnight Treasury volume was actually below average (~80%) with 20-years the only benchmark seeing above-average volume (104%) overnight ahead of today's auction of the same.
… Equally interesting is our next, probably related chart of Treasury 10yr yields in a quarterly format. We showed this yesterday and 10's probed their own multi-decade, secular bull trend overnight at the new rate move highs (~2.41%). Is USDJPY showing the way forward for US rates? Super-long-term momentum (lower panel) does hint of that; solidly leaning bearish as it appears...
Need MORE? A large Canadian operation morning comment
… Overnight Flows
Treasuries were modestly bid overnight with the 3-year sector outperforming. Overnight volumes were modest with cash trading at 88% of the 10-day moving-average. In a rare turn of events, the 10-year took the largest marketshare while 5s managed 30%. 2s and 3s combined to take 22% at 12% and 10%, respectively. 7s managed 10%, 20s 1%, and 30s 5%. We’ve seen buying in 5s and 10s as well as selling in the long end.
… and for some MORE of the news you can use » IGMs Press Picks for today (23 March) to help weed thru the noise (some of which can be found over here at Finviz).
Jumping in to a few things which hit the Global Wall Street inbox and you might find of interest … These are the things I’m reading before MY day starts as I attempt to stay in-the-know and as my views develop:
Marcus Ashworth (BBG OpED) writes / reminds us that, “The Fed Isn’t at the Mercy of the Yield Curve” but the yield curve isn’t an independent thing.
It is not as if there’s some governing body that says, hey we want a certain outcome … go hit the yield curve button.
The curve is where investors and traders place their money in certain ways and outcomes then are delivered. Eventually. In the fullness of time. The Fed is THEN simply trying to play along with its long and well-advertised and often desired, lag.
DBs very early read on the curve and the Fed,
…The big question now is whether all this prospective Fed tightening will push the economy into recession or whether policymakers can achieve the much sought-after “soft landing” that avoids one. Readers will know that my favourite cycle indicator is the 2s10s, with an inversion of this curve having preceded every US recession in the last 70 years, and that’s already flattened to its lowest levels of this cycle as mentioned. However, as I examined in my chart of the day yesterday (link here), the Fed have long preferred measures like the spread between the 18m forward 3m yield and the 3m yield, which is the steepest on record in data going back to 1996. So depending which metric you look at we’re either the closest or the furthest away from a recession we’ve been all cycle! Please let me know if you’re not on Chart of the Day and want to be on it.
For somewhat MORE from DBs Jim Reid, there’s THIS LINK FOR PUBLIC USERS to view following presentation
We are launching two C-Suite documents today, primarily aimed at our corporate clients but suitable for all who are interested in a high-level view of the big issues. Luke Templeman is publishing a “C-Suite Europe” where we assess the stakes for the economy and corporates as they adjust to war and its resonating effects, particularly given the commodity and energy exposures. Let us know if you don't have a copy.
In this C-Suite US, we look at what usually happens next after a Fed hiking cycle and also the risks that it brings to the economy and asset prices. Indeed, the Fed embarked on its latest rate hiking cycle at the March FOMC, and signaled that liftoff was just the beginning. With the Fed behind the curve on inflation, markets and the Fed are forecasting a series of rate hikes this year along with a reduction in the Fed's asset holdings. In this presentation, we review:
How far behind the curve the Fed is on inflation
The Fed's guidance for how tight policy needs to get to tame inflation
Impact to markets and growth during previous hiking cycles
Current risks around the next recession
The Fed's room to hike and prospects to engineer a soft landing
Financial vulnerabilities revealed during hiking cycles
Wait, what? Said curve which doesn’t dictate anything TO the Fed (Ashworth) is already pricing in rate CUTS? What could these guys possibly know? So much for the concept of vigilante’ism
On price action and technicals, this WEEKLY macro chart pack from 1stBos which this week focusing on yields
Core Themes
Government Bond Yields have surged higher this week, with most markets reaching our core bearish objectives. We believe the move can still extend further yet, particularly at the long-end of the US Yield curve, but for most markets, we are now in the broad zone where we are watching for technical signs of a peak, which is notable, as we have relatively consistently been calling for higher yields since Q4 2020. In line with this, we turn tactically bullish on US High Yield on a 1-3 month horizon.
10yr US Bond Yields have reached our core objective at 2.34%. Given the very strong short-term momentum, we look for the rise to extend further in the short-term, with next supports seen at 2.50% and then 2.615/645%, where we would have greater confidence in a ceiling. Given all this, we are now watching carefully for any technical signs of a peak to confirm that the market is set to move into a high-level rangebound phase.
I’d ALSO like to pass along a few LEVELS to watch which were offered a couple days ago, now … still seem relevant as mid-week upon us which then leads to greater anticipation of weekly closing levels (ok, am I rushing ?? can you blame me?)
… US10YR: Price action traded to a high of 2.32% on the day and is approaching a 2.56-2.66% range (76.4% Fibonacci & 200-month-MA). If price action can break and close above 2.56-2.66%, it could suggest an extension higher toward the inverted head & shoulders target at 3.26% with intermediate resistance at 2.90%.
US30YR: Is testing resistance at 2.51% (2021 high). If price action can close above 2.51% on a weekly basis, it could suggest a move higher to 2.81-2.87% range (76.4% Fibonacci & 20-year descending resistance) with the potential to extend higher to horizontal resistance at 3.47% (2018 high)…
WEEKLY closes always more informative than hourly and daily. MONTHLY TLINES, are then, by default, more worthwhile than weekly.
Next up a few words (OpED) and visual from BBGs John Authers caught my eye
Fright in Bond Markets Feels Like 2007 All Over Again
… If all of this is ample cause for fright, there is also the issue of habit, and how traders and investors can be expected to respond to events of which they have no practical experience. Ten-year Treasury yields have been trending downwards steadily ever since Paul Volcker raised rates enough to cause a recession in the early 1980s. Every time it reaches the top of a cycle and touches or at least nears the downward trend line, a financial accident occurs. In the chart below, the circles indicate the Black Monday crash of 1987, the Orange County and Tequila crises of 1994; the bursting of the dot.com bubble in early 2000; and the onset of the credit crisis in 2007. Then in early 2018, when the Fed’s tightening actually brought yields above their long-term trend, we witnessed the so-called “Volmageddon” selloff early in the year, when bets on volatility to stay low when spectacularly wrong, and the “Christmas Eve Massacre” selloff at the end. All that financial turbulence was enough to force the Fed to pivot and abandon its tightening:
Note what is so strange about the juncture at which we find ourselves. In the first chart, I circled a series of times when market action of the kind we’ve just seen showed that it was a great time to buy stocks. Now, I’ve shown another chart where all the circles indicate when it would have been a great idea to sell stocks. The performance of stocks relative to bonds suggests we’re at the beginning of a big upswing; the absolute performance of bond yields in their own right suggests we need to bail out now before another crisis engulfs us.
How is this going to resolve itself? I wish I knew…
Me too, John. Me too. here’s another view of the ‘long term’ in 10yy,
WATCHING and moving along, I’d ALSO like to mention Edward Harrisons latest for BBG as he details
This Is What a Bear Market Is Like
… But if this was just a risk re-assessment, shares of the least risky companies like consumer staples or healthcare would be less affected. Even with the economy running as strong as it is right now, economic growth worries are starting to creep in. The bond market offers a good signal here. Earlier this year, when the Federal Reserve signaled a willingness to increase its benchmark interest rate, medium- and longer-term yields rose in anticipation of the move. That’s when real estate and tech peaked. Back in 2007, it was only after longer-term rates started falling -- in anticipation of recession — that the whole stock market peaked that October.
… But the risk is skewed somewhat to the downside. And the bond market again tells us why. There’s a massive divergence between the Fed’s preferred measure of recessionary risk — the spread between 3-month Treasuries and 10-year ones — and other measures of that risk.
We already know that the Fed held off from raising its policy rate sooner in anticipation of inflation receding once temporary price surges eased. That keeps 3-month yields low. But with markets and the Fed now signaling it will have to act more aggressively, there is a real risk of hurting the economy. And that’s when the short end of the curve will start to flatten amid expectations of rate cuts.
If bond market fears are proved right, then Treasury curve spreads will continue to converge to the downside. And in extremis, as a signal of recession, long-term Treasury yields could even fall like they did in 2007. The longer part of the curve between five and seven-year yields is now at its flattest since that year. That would mean the brief rally in equities would come unstuck and we would learn we’ve been in a bear market all along.
GUGGs CIO (Minerd): For Lessons on Fighting Inflation, Skip Over Volcker to 1946
Now with all of this in mind and what may, at times, feel like peak bond pessimism, well … THIS from BBG
… Stock traders aren't the only ones keen on buying dips. Despite the intensifying selloff in Treasuries, some investors have been filling their boots with bonds, notably those with longer maturities. The iShares 20+ Year Treasury bond ETF has seen four days of solid inflows through Monday including a record net $1.6 billion of purchases on Friday. The fund has been pummeled thanks to the global debt selloff and is mired in a bear market, down 23% from its 2020 high. Still, there is a case to be made for longer-dated debt, even though the consensus is for further losses. For income investors, 30-year Treasuries now yield over 2.6%, the highest since 2019. That's almost double the 1.5% forward dividend yield on the S&P 500. And the tidal wave of selling could soon ebb if U.S. economic data begins to disappoint and investor concern rises about the possibility of recession. Federal Reserve Chair Jerome Powell’s aggressive comments this week revived the chances of a bumper half-point rate hike in the early summer. That doesn't help bonds. But the prospect of a Fed pause later in the year would likely lend some support to the asset class if there's a sense that aggressive rate hikes are damaging the economy.
So higher rates brings in buyers? Really? Yep it even hit the CNBC crowd,
In other words,
Some sage (investment)advice
… THAT is all for now. Off to the day job…