Bond Traders Weekly Outlook: Global Bond Market Liquidity Deleveraging

U.S. Treasuries finished the holiday-shortened week despite mounting global stress, Treasuries yields were pulled modestly higher. Ten-year Treasury yields gained nine bps this week to 4.26%, with benchmark MBS yields rising 11 bps to 6.00%. Global bond market liquidity appears increasingly under the grips of deleveraging. This week’s action left the 2s10s spread unchanged at -71 bps. Crude oil gained $1.92, or 2.2%, for the week while the U.S. Dollar Index gained 0.8% this week. What stands out to us is bonds are just not seeing much benefit from changes in Fed rate policy expectations.

Hungry Bond Traders

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.

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.

Weekly Recap

U.S. Treasuries face speculation about next week’s US CPI and the outcome of next week’s policy meeting at the European Central Bank. This week’s action left the 2s10s spread unchanged at -71 bps. Crude oil gaining $1.92, or 2.2%, for the week while the U.S. Dollar Index gained 0.8% this week. What stand out to us is bonds are just not seeing much benefit from changes in Fed rate policy expectations. The rates market says the Fed’s tightening cycle is likely over, yet bonds have not fully bought it or is the overhanging heavy supply the devil in all this?

Global market “risk off” continues to gather momentum. In forex markets the Chinese Yuan weakened another 1.06% against the dollar this week to the weakest level since 2007. The cracks are being exposed on the “periphery.” The Chilean peso dropped 5.0%, the Polish zloty 3.9%, the Mexican peso 2.9%, and the Czech koruna 1.9%.

Local Yields were up again:

  • Mexico’s local currency 10-year yields jumped 19 bps to 9.53%, the high since October.
  • Yields rose 18 bps in Indonesia (6.52%),
  • 16 bps in Brazil (11.30%), 12 bps in South Africa (11.91%).

EM dollar bonds were under heavy selling pressure.

  • Yields jumped 24 bps in Colombia (7.79%),
  • 20 bps in Peru (5.54%),
  • 19 bps in Mexico (5.89%),
  • 15 bps in Chile (5.33%),
  • 15 bps in Russia (18.91%),
  • 14 bps in the Philippines (5.10%).

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.”

Yield Watch


  • 2-yr: +1 bp to 4.97% (+9 bps for the week)
  • 3-yr: +2 bps to 4.69% (+12 bps for the week)
  • 5-yr: +2 bps to 4.40% (+11 bps for the week)
  • 10-yr: UNCH at 4.26% (+9 bps for the week)
  • 30-yr: -2 bps to 4.33% (+4 bps for the week)

Key Rates and Spreads


  • 10-year Treasury bonds 4.26%, up +0.14% w/w (2.60-4.34) (new 10-year high intraweek w/e 8/21/23)
  • Credit spread 1.82%, unchanged w/w (1-yr range: 1.76-2.42)
  • BAA corporate bond index 6.08%, up +0.14% w/w (1-yr range: 5.28-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 7.08%, down -0.31% w/w (5.05-7.39) (new 20+ year high 8/25/23 w/e)

Yield Curve

  • 10-year minus 2-year: -0.72%, down -0.02% w/w (1-yr range: -1.06 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.20%, up +0.07% w/w (1-yr range: -1.69 – 2.04) (new low)
  • 2-year minus Fed funds: -0.35%, up +0.10% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Money Market Flows

  • Investment-grade bond funds posted outflows of $2.103 billion, while junk bond funds reported inflows of $252 million (from Lipper).
  • Total money market fund assets surged $41.8bn to a record $5.625 TN, with a 26-week gain of $731bn (30% annualized). Total money funds were up $1.061 TN, or 23.2%, y-o-y.
  • Total Commercial Paper dropped $24.7bn to $1.160 TN. CP was down $38bn, or 3.2%, over the past year.

Bond auctions this week:

Bond auctions week ahead:

Next week will bring some new supply.

  • Monday: 13- and 26-week bills, $44 bln 3-yr Treasury note auction results at 13:00 ET
  • Tuesday: 52-week bills; 42-day CMB 17-week bills; $35 bln 10-yr Treasury note reopening results at 13:00 ET
  • Wednesday: 4- and 8-week bills, $20 bln 30-yr Treasury bond reopening results at 13:00 ET;
  • Thursday: 4- and 8-week bills

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit declined $22.1bn last week to $8.065 TN.
  • Fed Credit was down $836bn from the June 22nd, 2022, peak.
  • Over the past 208 weeks, Fed Credit expanded $4.339 TN, or 116%.
  • Fed Credit inflated $5.254 TN, or 187%, over the past 565 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt declined $5.2bn last week to a six-week low $3.461 TN.
  • “Custody holdings” were up $43bn, or 1.3%, y-o-y.

Powell at the FOMC: “The federal-funds rate is at a restrictive level now. So, if we see inflation coming down credibly, sustainably, then we don’t need to be at a restrictive level anymore. We can move back to a neutral level and then below a neutral level at a certain point… And you’d start cutting before you got to 2% inflation too. Because we don’t see ourselves getting to 2% inflation until—you know, all the way back to 2 until 2025 or so.”

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates fell eight bps to 7.14% (up 125bps y-o-y).
  • Fifteen-year rates slipped three bps to 6.66% (up 150bps).
  • Five-year hybrid ARM rates rose nine bps to 6.92% (up 228bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 12 bps to 7.67% (up 157bps) – the high back to 2008.
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.

Contagion Emerging Market (EM) bond yields reversed sharply higher.

Emerging Market (EM) CDS jumped 19 to 222 bps, the largest weekly gain since the banking crisis week of March 17th.

(August 18,2023)

  • Vietnam CDS rose 13 to 128 bps,
  • Philippines 12 to 114 bps, Indonesia 12 to 93 bps.
  • Panama CDS surged 21 (largest gain since September 2022) to 118 bps,
  • Colombia 21 (largest since March) to 229 bps,
  • Brazil 18 (March) to 192 bps, Peru 16 (March) to 87 bps,
  • Mexico 10 (March) to 115 bps.

Dollar denominated EM debt surged higher

  • Peru jumped 27 bps to a five-month high 5.67%;
  • Philippines 31 bps to a five-month high 5.26%;
  • Indonesia 29 bps to a nine-month high 5.27%;
  • Brazil 23 bps to a near 10-month high 6.59%;
  • Mexico 19 bps to a nine-month high 5.95%;
  • Chile 22 to a nine-month high 5.42%.

Local currency yields

  • 132 bps in Brazil to a two-month high 11.24%.
  • Mexico yields jumped 27 bps to 9.33%,
  • Colombia surged 46 bps to 10.89%.

Crude oil bounced off its 50-day moving average (71.29), rising toward its June high (75.06). With the pullback in yields the U.S. Dollar Index fell 0.9% to 102.28 through its 50-day moving average (102.92), resulting in a 0.6% loss for the week.

Major Benchmark 10-year Bond markets

Bond Market Performance 2023

Major 10-year Bonds/Notes

Highlights – European Bonds

  • Greek 10-year yields jumped 12 bps to 3.95% (down 62bps y-t-d).
  • Italian yields rose 11 bps to 4.35% (down 35bps).
  • Spain’s 10-year yields gained seven bps to 3.65% (up 13bps).
  • German bund yields increased six bps to 2.61% (up 17bps).
  • French yields rose seven bps to 3.14% (up 16bps).
  • The French to German 10-year bond spread widened one to 53 bps.
  • U.K. 10-year gilt yields were unchanged at 4.42% (up 75bps).

Gilts Sold Reminds of Risk.

(We keep this as a reminder so events like Fitch’s downgrade of the US are not a Surprise)

Post ADP, Pre-June CPI/PPI Dropped:

  • UK 10-year yields were up 16 bps Thursday to 5.54%, with two-year yields surging as much as 18 bps to a 15-year high 5.54%. Reminiscent of last fall, UK yields were pulling global yields higher – even before the jolt from strong U.S. data.
  • Italian 10-year yields surged 21 bps Thursday (4.37%),
  • Greek yields jumped 18 bps (3.97%).
  • Ten-year yields rose 17 bps in Spain (3.70%) and Portugal (3.36%).
  • Canadian 10-year yields surged 30 bps this week to an eight-month high of 3.57%.
  • Australian 10-year yields jumped 23 bps this week to 4.26% – the high since January 2014.
  • New Zealand yields rose 22 bps to 4.85% – the high since July 2011.

The UK’s 10-year bond yields are the highest in the G7, 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

  • Japanese 10-year “JGB” yields added two bps to 0.66% (up 23bps y-t-d).

The Bank of Japan and its new Governor felt compelled to do, so, it tinkered with YCC (yield curve control), cleverly achieving some flexibility without unleashing a panic. Ueda adjusting a policy after signaling no move would be forthcoming left the markets feeling ‘betrayed’. There was a leak the day before the meeting. Ueda stated the YCC tweak “didn’t represent a step toward normalization” and the “BOJ still sees a long way to achieving price goal.” Ah, huh … the market sighed collectively.

July 28 – Financial Times (Kana Inagaki, Leo Lewis and Hudson Lockett): “The Bank of Japan has eased controls on its government bond market, altering a cornerstone of its ultra-loose monetary policy and prompting a surge in the country’s benchmark bond yields to the highest level in nine years. In an unexpected move, the BoJ said it would offer to buy 10-year Japanese government bonds at 1% in fixed-rate operations, in effect widening the trading band on long-term yields. The central bank added that it was technically maintaining its previous 0.5% cap on 10-year bond yields, but this level would be a ‘reference’ rather than a ‘rigid limit’. The move triggered confusion about whether the central bank would make further moves to unwind its easing policy, which has come under pressure this year from inflation that has hit four-decade highs. But the BoJ held its overnight rate at minus 0.1%, saying more time was needed to sustainably achieve its 2% inflation target.”

Key US Bond Auction Highlights

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

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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