Bond Traders Weekly Outlook: Fed Favorites PCE and ECI

U.S. Treasuries ended the week mostly lower, the 2-yr Treasury note yield rose six basis points this week to 4.16% and the 10-yr note yield rose five basis points to 3.57%. The 2s10s spread compressed by a basis point to -59 bps. The market continues to contend with the notion that the Fed will keep rates higher for longer. FOMC voters, Philadelphia Fed President Harker, Fed President Williams and Cleveland Fed President Mester all said Fed needs to do more to get inflation back down to target. Next week we get PCE and ECI together to help the market price the Fed’s path.

We had the one lackluster Treasury reopening this week, the 20-yr bond reopening was rated a C. Next Week’s U.S. Treasury Bond Auction Schedule includes $42 billion 2-year notes, $43 billion 5-year notes,
and 35 billion 7-year notes.

Hungry Bond Traders

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.

There is a firm belief the Central Banks are 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.

Weekly Recap

The 2-yr Treasury note yield rose six basis points this week to 4.16% and the 10-yr note yield rose five basis points to 3.57%. The 2s10s spread compressed by a basis point to -59 bps.

An acceleration in the preliminary IHS Markit Services PMI for April (to 53.7 from 52.6) and a return to expansion in the IHS Markit Manufacturing PMI (to 50.4 from 49.2) put paid to treasuries attempt to rally Friday. Rate hike expectations climbed a tad this week with the implied likelihood of a 25-bps increase in May climbing to 85.4% from 78.0% a week ago. The implied likelihood of another hike in June grew to 27.3% from 16.6% a week ago.

Looking outside the U.S. bubble on emerging markets CDS jumped 10 bps (to 241), fully reversing the previous week’s pullback and trading near a one-month high. The Brazilian real fell 2.8%, Colombian peso lost 2.2% and South Korean won dropped 2.0%, the biggest weekly drop in two months Bloomberg said. Chinese markets were notably weak. Double-digit inflation pushed UK two-year yields up another 13 bps to 3.73%, trading this week to the highs since February. Italian two-year yields rose nine bps to a six-week high of 3.49%.

“US bank deposits fell last week, indicating the financial system remains fragile after a string of bank failures. Deposits decreased by $76.2 billion in the week ended April 12, according to seasonally adjusted data from the Federal Reserve out Friday. The drop was mostly at large and foreign institutions, but they also fell at small banks. Meantime, commercial bank lending rose $13.8 billion last week on a seasonally adjusted basis. On an unadjusted basis, loans and leases fell $9.3 billion.”

April 21 – Bloomberg (Alexandre Tanzi and Augusta Saraiva)

For bond traders the big question is the U.S. bank lending boom still intact after the collapse of lending from the regional bank bankruptcies’, or has the Bubble been pierced? Bank earnings conference calls were insightful to the huge inflow from the Fed in the past month. Simply, a bubble maintaining an inflationary bias will demonstrate a powerful response to stimulus. The flipside is if the bubble deflates, it will develop increasing resistance to stimulus measures. Was the past month a big enough shock to ‘restart’ the stimulus process?

  • Investment-grade bond funds posted inflows of $1.140 billion, and junk bond funds reported positive flows of $3.064 billion (from Lipper).
  • Total money market fund assets dropped $68.6bn to $5.209 TN, yet still have a six-week gain of $315 billion. Total money funds were up $740bn, or 16.6%, y-o-y.
  • Total Commercial Paper gained $15.3bn to $1.161 TN. CP was up $75bn, or 6.9%, over the past year.

Bond auctions last week:

Next Week’s U.S. Treasury Bond Auction Schedule

  • Tuesday $42 billion 2-year notes next Tuesday
  • Wednesday $43 billion 5 your notes
  • Thursday $35 billion 7 year notes
  • All issues will settle May 1

Yield Watch


  • 2-yr: -1 bp to 4.16% (+6 bps for the week)
  • 3-yr: +3 bps to 3.90% (+6 bps for the week)
  • 5-yr: +2 bps to 3.66% (+5 bps for the week)
  • 10-yr: +3 bps to 3.57% (+5 bps for the week)
  • 30-yr: +3 bps to 3.78% (+4 bps for the week)

Key Rates and Spreads


  • 10-year Treasury bonds 3.52%, up +0.05 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 2.07%, up +0.02 w/w (1-yr range: 1.76-2.42)
  • BAA corporate bond index 5.59%, up +0.07 w/w (1-yr range: 4.31-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.66%, up +0.16% w/w (1-yr range: 5.05-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.63%, down -0.05% w/w (1-yr range: -0.86 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.60%, down -0.12% w/w (1-yr range: -1.17 – 2.04) (new low)
  • 2-year minus Fed funds: -0.63%, up +0.10% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Two Year Treasury Volatility was Historic in the First Quarter of 2023

  • Two-year Treasury yields began 2023 at 4.43% then fell to 4.10% by February 2nd.
  • Yields then surged almost 100 bps to trade to 5.07% on March 8th. Volatility was on steroids.
  • Yields were down to 3.71% intraday on the 15th, only to rally back to 4.25% on the 17th.
  • They sank to a low of 3.63% on the 20th, back up to 4.25% on the 22nd,
  • Then down to 3.55% on the 24th
  • Ended the quarter at 4.03%.
  • The yield on the 2-year Treasury fell to 4.06%, down 3.7 basis points on Friday and posting the biggest monthly drop since January 2008, in March the yield fell 73.5 basis points. Its first quarterly retreat in eight quarters.
  • The yield on the 10-year Treasury was at 3.491%, off 5.9 basis points, and recording its sharpest monthly fall since March 2020.
  • The yield on the 30-year Treasury declined to 3.688%, down 5.7 basis points, while setting its biggest monthly decline since January.

US corporate bond spreads over US Treasuries and how they have widened as cyclical risk have risen but are well shy of the wide spreads recorded during the early part of the pandemic, let alone the GFC. To label this as a severe credit crunch would be extreme.

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit declined $15.5bn last week to $8.571 TN.
  • Fed Credit was down $330bn from the June 22nd peak.
  • Over the past 187 weeks, Fed Credit expanded $4.844 TN, or 130%.
  • Fed Credit inflated $5.760 Trillion, or 205%, over the past 545 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt gained $6.7bn last week to $3.338 TN.
  • “Custody holdings” were down $108bn, or 3.1%, y-o-y.

It’s been four weeks since the implosion of three US banks, Silicon Valley Bank, Signature Bank and Silvergate Capital Corp. From there we saw further selling of Credit Suisse that has never recovered from Archegos and the panic selling and speculative attacks on other US Regional banks. The Federal Reserve has worked in concert with the Treasury and major money center banks to stabilize conditions. The speed of protective measures for the financial system has been impressive but with that longer-run moral hazard problems and adverse incentives are front and center.

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates increased five bps to 6.39% (up 128bps y-o-y).
  • Fifteen-year rates rose 11 bps to 5.72% (up 134bps).
  • Five-year hybrid ARM rates jumped 12 bps to 5.83% (up 208bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up seven bps to 6.93% (up 170bps).
Mortgage News Daily February 17, 2023

Global Bond Watch

“Government bond prices around the world are moving in tandem, reducing investors’ ability to diversify their portfolios and raising concerns of being blindsided by market gyrations. Correlations between currency-adjusted returns on the government debt of countries such as the U.S., Japan, the U.K. and Germany are at their highest level in at least seven years, data from MSCI showed, as central banks around the world ramp up their fight against inflation.”

October 10 – Reuters (Davide Barbuscia)

Major Benchmark 10-year Bond markets

Bond Market Performance 2023

Major 10-year Bonds/Notes

Highlights – European Bonds

Ten-year government yields down significantly.

  • Greek 10-year yields were unchanged at 4.29% (down 28bps y-o-y).
  • Italian yields rose six bps to 4.35% (down 35bps).
  • Spain’s 10-year yields increased four bps to 3.52% (up 1bp).
  • German bund yields gained four bps to 2.48% (up 4bps).
  • French yields rose four bps to 3.04% (up 6bps).
  • The French to German 10-year bond spread was little changed at 56 bps.
  • U.K. 10-year gilt yields jumped nine bps to 3.76% (up 9bps). 

This all happened quickly…. just weeks ago we had:

Highlights – Asian Bonds

  •  Japanese 10-year “JGB” yields were unchanged at 0.47% (up 5bps y-t-d).

“The unprecedented monetary easing by the Bank of Japan over the past decade has reshaped the nation’s lenders, from their asset holdings to loan income. That may be about to change as the central bank prepares to take on a new chief next month… The most notable case is Japan Post Bank Co., a unit of a former state-run mail services giant, which manages most of almost $2 trillion of assets in its securities portfolio. Where it once invested as much as 80% of its money in JGBs, this now accounts for less than 20%. Instead, the bank has rapidly built up its holdings of foreign bonds and other securities to 78 trillion yen ($572bn), accounting for about 35% of its entire portfolio.”

March 5 – Bloomberg (Taiga Uranaka)

Key US Bond Auctions

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

Note these charts, opinions, news, estimates and times are subject to change and for indication only. Trade and invest at your own risk.

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