Bond Traders Weekly Outlook: Pressure Alleviated in 2s10s Spread with BOJ

U.S. Treasuries last week alleviated some pressure on the 2s10s spread, which expanded by 16 bps to -56 bps. The U.S. Dollar Index slipped 0.1% to 104.33, down 0.5% for the week leading into Christmas.  Bonds ended the week lower with number of releases, Japan’s November core CPI increased at its fastest yr/yr pace since 1981 in the November. The big event for bonds was the Bank of Japan shocking market by adjusting the central bank’s yield curve control program with saw yields rise sharply and a similar move in the yen. Dollar Yen went from 137.20 to 133.20 on the announcement. 10-year JGB yields surged to 0.455%, the highest since 2015 leading to a limit down halt on the Osaka Exchange.

US economic data released over the week prompted the Atlanta Fed to raise its GDPNow forecast for Q4 growth to 3.7% from 2.7%. Treasuries widened losses Friday after the Personal Income/Outlays report for November showed slightly better than expected income growth.

Hungry Bond Traders

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. A Bloomberg headline is insightful, “Bond Traders Dismiss Fed’s Hawkish Tone, Bet on 2023 Rate Cuts.”

Weekly Recap

U.S. Treasuries were lower by weeks’ end. The core personal consumption expenditure price index (Core PCE prices) in the US, which exclude food and energy, rose by 0.2 percent month-over-month in November of 2022 as expected.  The annual rate, the Federal Reserve’s preferred gauge of inflation, fell to 4.7 percent from 4.7 percent, also with expectations.  Notably real personal spending, adjusted for changes in prices was flat after it rose 0.5% in October which had been the most since the start of the year and largely reflecting a surge in outlays for merchandise. The big move was in currency markets and global spreads after the BOJ moved on spreads.

We had one bond auction, $12 billion 20-yr Treasury bond reopening, which met strong demand, which had not been seen in recent sales of this tenor. Treasuries were higher after the auction’s completion, but eventually rested back at the levels just before the bond sale.

Nothing to change last week’s look into the CPI the sticky, and elevated, core services number was a concern ahead of the FOMC, and helps explain the hawkish in the updated Summary of Economic Projections, and Fed Chair Powell’s press conference last Wednesday.  The median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%.

Central Bank Collusion: Since last Wednesday Fed +50bps ECB +50bps Bank of England +50bps Swiss National Bank +50bps Banco de México +50bps Philippines +50bps Hong Kong Monetary Authority +50bps Norges Bank +25bps Taiwan +12.5%bps Mexico +50bps Indonesia +25bps Turkey UNCH

Recall ECB Chair Lagarde was fearsome in her dire warnings for the European economy following the ECB announcement. The market worried even more about the risk facing Europe with high energy costs, in Italy in particular.

Reuters: “Debt-Laden Italy Lashes Out at ‘Crazy’ ECB After Rate Hike.” Monetary union instability is here, if it ever left of course.

The result saw safe haven treasury bond buying. Treasury yields declined this week in the face of a surge in European yields. German bund yields jumped 22 bps to 2.15%, with the spread to Treasuries narrowing a notable 31 bps to a two-year low 135 bps. French 10-year yields jumped 28 bps (2.68%), Spanish yields 29 bps (3.25%), and Portuguese yields 31 bps (3.17%). Italian yields surged 46 bps (up 69bps in six sessions) to a six-week high 4.30%.

The Fed and ECB didn’t let up Friday a weel ago with further rate hike speculation remained alive as several policymakers from the European Central Bank waxed on about the need to continue raising rates while San Francisco Fed President (non-voter until 2024) Daly said that it would be reasonable to hold rates at a peak level for nearly a year and that she doesn’t understand why the market is optimistic about future inflation

Yield Watch

  • 2-yr: +6 bps to 4.31% (+11 bps for the week)
  • 3-yr: +6 bps to 4.09% (+19 bps for the week)
  • 5-yr: +7 bps to 3.86% (+24 bps for the week)
  • 10-yr: +8 bps to 3.75% (+27 bps for the week)
  • 30-yr: +10 bps to 3.82% (+29 bps for the week)
  • Investment-grade bond funds posted outflows of $6.089 billion, and junk bond funds reported negative flows of $3.500 billion (from Lipper).
  • Total money market fund assets fell $28.2bn to $4.713 TN. Total money funds were up $47bn, or 1.0%, y-o-y.
  • Total Commercial Paper dropped $24bn to $1.278 TN. CP was up $195bn, or 18%, over the past year.

Key Rates and Spreads


  • 10-year Treasury bonds 3.75%, up +0.26 w/w (1-yr range: 1.40-4.22) (12 year high)
  • Credit spread 1.91%, down -0.01 w/w (1-yr range: 1.65-4.31)
  • BAA corporate bond index 5.66%, up +0.25 w/w w/w (1-yr range: 3.13-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.32%, up +0.15% w/w (1-yr range: 2.75-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.58%, up +0.12% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -0.58%, up +0.23% w/w (1-yr range: -0.82 – 2.04) (new low)
  • 2-year minus Fed funds: 0.00%, up +0.14% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

10 Year Note Technical Analysis via KnovaWave

Key Bond Auctions

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates increased three bps to 6.20% (up 315bps y-o-y).
  • Fifteen-year rates slipped two bps to 5.50% (up 320bps).
  • Five-year hybrid ARM rates gained three bps to 5.39% (up 302bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down four bps to 6.57% (up 334bps).
Mortgage News Daily November 4, 2022

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)

Highlights – European Bonds

  • Greek 10-year yields jumped 22 bps to 4.51% (up 333bps y-t-d).
  • Italian yields rose 21 bps to 4.50% (up 333bps).
  • Spain’s 10-year yields gained 22 bps to 3.47% (up 291bps).
  • German bund yields surged 25 bps to 2.40% (up 258bps).
  • French yields rose 26 bps to 2.93% (up 273bps).
  • The French to German 10-year bond spread widened about one to 53 bps.
  • U.K. 10-year gilt yields surged 31 bps to 3.64% (up 267bps).
  • U.K.’s FTSE equities index rallied 1.9% (up 1.2% y-t-d).

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields jumped 13 bps to 0.385% (up 31bps y-t-d)

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.’”

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.

Highlights – Federal Reserve

  • Federal Reserve Credit declined $16.4bn last week at $8.531 TN.
  • Fed Credit was down $370bn from the June 22nd peak.
  • Over the past 171 weeks, Fed Credit expanded $4.820 TN, or 129%.
  • Fed Credit inflated $5.720 Trillion, or 203%, over the past 528 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt were little changed last week at $3.309 TN.
  • “Custody holdings” were down $116bn, or 3.4%, y-o-y.

Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test

The Federal Reserve released its annual bank stress test after the market last quarter. All 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks. With the dismal state of the economy through soaring inflation and record low consumer sentiment these tests were keenly watched. Banks suffered slightly more hypothetical losses in the 2022 severe test than last year, posting $612 billion in projected losses as capital ratios fell to 9.7%. Read More Here.

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