Austere Bond Rally in November Saw Best Bonds Performance Since 1985

U.S. Treasuries in November saw one of their sharpest most potent rallies in thirteen years, a combination of a short covering rally in an overcrowded short bond trade and economic data impacts. Overall, the US bond market had it’s best year since 1985. The month saw a big rally across the curve amid rising rate cut expectations for the middle of next year. The 10-yr yield lost more than 50 bps for the month, which was the largest drop in the benchmark yield since August 2011. This came despite yields pulling back on Thursday, giving back some of those big November gains. The market faced pressure from the start after a night that saw a full slate of economic reports and other news. Crude oil price action was part of the reason here.

Volatility around OPEC+ saw prices higher and causing inflation jitters, however this pulled back after an somewhat indecisive meeting. Oil lost $6.86, or 8.3%, this month. The U.S. Dollar Index rose 0.7% to 103.47 on Thursday, but still lost 3.0% this month. The S&P 500 is now just 5% away from its all-time high after it climbed over 8% in November.

Hungry Bond Traders

Thursday data developments were largely on course for what the bond market had been reacting to. China’s official PMI readings for November weakened with the Manufacturing PMI (actual 49.4; prior 49.5) falling further into contractionary territory while Non-Manufacturing PMI (actual 50.2; prior 50.6) also weakened but remained in expansion by a slim margin.

The flash November CPI report for the eurozone confirmed the disinflationary trend seen in Wednesday’s CPI readings from Germany and Spain while France’s Q3 GDP was revised down to -0.1% from +0.1%. The U.S. saw a larger than expected increase in weekly jobless claims and a Personal Income/Outlays report for October that was largely in-line with estimates. The Fed favorite Core PCE lower both yearly and monthly.

There is a firm belief the Central Banks have been blindly raising rates because ‘they have to’ and the consequences will be dire, furthermore that the US Administration is bumbling along with damaging decisions one after the other.

The longer rates stay elevated the risk of a downturn increases which appears to be borne out with Novembers price action. This is telling at the margin with more signs of consumer stress as higher borrowing costs and weaker hiring start to eat into household spending. With the Fed seen being close to its policy rate peak, next up is focusing on growth softening.

November Treasury Yields Performance

  • 2-yr: +4 bps to 4.70% (-38 bps in November)
  • 3-yr: +6 bps to 4.47% (-43 bps in November)
  • 5-yr: +8 bps to 4.30% (-52 bps in November)
  • 10-yr: +8 bps to 4.35% (-53 bps in November)
  • 30-yr: +6 bps to 4.51% (-51 bps in November)

Understandably, aware of past Fed behavior markets are conditioned for loose conditions. They expect Fed loosening measures to reverse any meaningful tightening, hence constant flipping between end of inflation and hawkish Fed speaks trades.

The Long Covering, Then Short Covering Moves Were Historic

Losses on longer-dated Treasuries are beginning to rival some of the most notorious market meltdowns in US history. Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020… That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century. The rout in 30-year bonds has been even worse, tumbling 53%, nearing the 57% slump in equities during the depths of the financial crisis.” October 4 – Bloomberg (Ye Xie):

Key Catalysts that empowered latest Treasury sell off:

“Based on projected intermediate- to long-term borrowing needs, Treasury intends to gradually increase coupon auction sizes beginning with the August to October 2023 quarter. While these changes will make substantial progress towards aligning auction sizes with intermediate- to long-term borrowing needs, further gradual increases will likely be necessary in future quarters.”

August 11 – Bloomberg (Farah Elbahrawy and Greg Ritchie): “US Treasuries are on course for a record year of inflows as investors chasing some of the highest yields in months pile into cash and bonds, according to Bank of America… Cash funds attracted $20.5 billion and investors poured $6.9 billion into bonds in the week through August 9… Meanwhile, US stocks had their first outflow in three weeks at $1.6 billion. Flows into Treasuries have reached $127 billion this year, set for an annualized record of $206 billion, BofA said.”

September 19 – Reuters (Rodrigo Campos): Global debt hit a record $307 trillion in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said… The financial services trade group said… global debt in dollar terms had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade. It said the latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336%. Prior to 2023, the debt ratio had been declining for seven quarters.”

Key Rates and Spreads

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Money Market Flows

  • Total Commercial Paper increased $10.0bn to $1.253 TN. CP was down $56bn, or 4.2%, over the past year.

2-, 10- and 30-Year Treasuries Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit declined $43.8bn last week to $7.776 TN.
  • Fed Credit was down $1.125 TN from the June 22nd, 2022, peak.
  • Over the past 219 weeks, Fed Credit expanded $4.049 TN, or 109%.
  • Fed Credit inflated $4.965 TN, or 177%, over the past 576 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt dropped $22.9bn last week to an almost five-month low of $3.408 TN.
  • “Custody holdings” were up $97.3bn, or 2.9%, y-o-y.

Powell at the FOMC: “So, obviously we’re monitoring, we’re attentive to the increase in longer-term yields and which have contributed to a tightening of broader financial conditions since the summer. As I mentioned, persistent changes in broader financial conditions can have implications for the path of monetary policy. In this case, the tighter financial conditions we’re seeing from higher long-term rates but also from other sources like the stronger dollar and lower equity prices could matter for future rate decisions, as long as two conditions are satisfied. The first is that the tighter conditions would need to be persistent and that is something that remains to be seen. But that’s critical, things are fluctuating back and forth, that’s not what we’re looking for. With financial conditions, we’re looking for persistent changes that are material.”

“So, I think what we can say is that financial conditions have clearly tightened, and you can see that in the rates that consumers, households and businesses are paying now, and over time that will have an effect, we just don’t know how persistent it’s going to be, and it’s tough to try to translate that in a way that I’d be comfortable communicating to how many rate hikes that is.”

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates dropped 12 bps to a 15-week low 7.13% (up 59bps y-o-y).
  • Fifteen-year rates fell 13 bps to 6.58% (up 70bps).
  • Five-year hybrid ARM rates sank 19 bps to 6.82% (up 131bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up five bps to 7.82% (up 109bps).
Mortgage News Daily

Global Bond Watch

Higher for longer is a serious threat.

Global Yields Spiking Higher

Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. This may well be a push over the cliff for troubled commercial real estate (CRE). Leveraged lending and leveraged finance gets more costly. Simply there are trillions of floating rate loans among individuals, speculators, businesses, and nations.

Major Benchmark 10-year Bond markets

Bond Market Performance 2023

Major 10-year Bonds/Notes

Highlights – European Bonds

  • talian yields rose four bps to 4.40% (down 30bps).
  • Greek 10-year yields dipped two bps to 3.82% (down 75bps y-t-d).
  • Spain’s 10-year yields gained four bps to 3.63% (up 12bps).
  • German bund yields rose five bps to 2.64% (up 20bps). French yields gained five bps to 3.20% (up 22bps).
  • The French to German 10-year bond spread was unchanged at 56 bps.
  • U.K. 10-year gilt yields surged 18 bps to 4.28% (up 61bps).

Italy’s and the UK’s 10-year bond yields are the highest in the G7 after the U.S. as markets continue to worry about the extent of interest rate hikes that will be needed to bring inflation back under control.

Highlights – Asian Bonds

  • apanese 10-year “JGB” yields increased two bps to 0.78% (up 36bps y-t-d).

Key US Bond Auction Highlights

Woeful 30-year Treasury Bond Auction with Record 5.3 bps Tail Completes Week’s Offerings

U.S. 10-year Bond Auction Auctioned at 4.61%, Highest Yield at Auction Since 2007 Ahead of CPI

Dismal 3-year Bond Auction in Another Week of Heavy Supply Gets an F Rating

Inflation Matters

Inflation with Henry Kaufman

Kaufman is the legendary chief economist and head of bond market research at Salomon Brothers is someone who knows Inflation.  Henry Kaufman in an interview with Bloomberg’s Erik Schatzker Jan 14, 2022:

 “I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector — and the more it will have to shock the system.”

“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”

Inflation, Disinflation

The rubber is meeting the road as the trifecta of rising interest rates, the Russian invasion of Ukraine and surging costs continues to weigh, this has been no surprise to us here and shouldn’t have been to the market and PTB. You can only play with fire for so long before you get scorched!

With all the redirection of blame at the Fed about inflation one has to understand it is a global phenomenon outside the Fed’s Control. With the war drums louder than ever the supply chain issues are out of control. The Federal Reserve is not in control of global energy and commodities prices.

Everything points to powerful inflationary dynamics and a Federal Reserve so far “behind the curve.”

Instability is pronounced, credit defaults are on track to rise in North America, Europe, Asia, and Australia, according to a survey by the International Association of Credit Portfolio Managers. The economic slump is likely to occur later this year or in 2023, according to the survey.


Global Bonds 2022 Performance

10 Year Bonds – Americas 2022 Performance

10 Year Bonds – Europe 2022 Performance

10 Year Bonds – Asia 2022 Performance

10 Year Bonds – Africa 2022 Performance


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Sources: Scotia Bank, TC, FT

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