Bond Traders Weekly Outlook: Tidal Wave of Global Central Bank Decisions Await

Ahead of a tidal wave of global central bank monetary policy decisions over the coming week U.S. Treasuries closed the week on a modestly lower note as yields drifted higher for the week. The 2-yr note yield rose seven basis points this week to 5.04%. The 10-yr note yield rose seven basis points this week to 4.33%. It was a busy week for bonds with this week’s CPI and PPI inflation data which was supportive of stocks. August core consumer price inflation was up 4.3% year-over-year, versus 4.7% in July, which is what the Fed monitors more closely, showed ongoing improvement on a year-over-year basis; however, it is still well above the Fed’s 2.0% target, which will certainly keep the Fed in a “higher for longer” mindset.

In the week ahead we get the Fed’s FOMC, Bank of England, Norges Bank, Hong Kong, Riksbank, Swiss National Bank, Banco Central do Brasil, Central Bank of China Taiwan, Bangko Sentral ng Pilipinas, Bank Indonesia, Turkey’s Central Bank and South African Reserve Bank. Further to that a slew of global macro readings.

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.

The longer rates stay elevated the risk of a downturn increases. 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.

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

The week featured sticky U.S. CPI rising 0.6% in August, the strongest one-month gain since June 2022. At 3.7%, y-o-y inflation was the highest since May. “Core” inflation rose a stronger-than-expected 0.3% for the month (strongest since May), with y-o-y “core” at 4.3%. The 2-yr note yield rose seven basis points this week to 5.04%. The 10-yr note yield rose seven basis points this week to 4.33%.

A few of the higher risk headlines for prices:

  • “Auto Insurance Year-Over-Year Surge Highest Since 1976.”
  • “UAW Workers Launch Unprecedented Strike Against All Big Three Automakers.”
  • “Gasoline Prices Soar to US Seasonal Record on Crude’s Rally.”

For risk on a continued rise in oil prices is perhaps acting as an offset along with some trepidation in front of next week’s FOMC meeting and publication of an updated Summary of Economic Projections. The U.S. Dollar Index dipped 0.1% to 105.31.

US Producer Prices Higher in August, Cost of Gasoline Surged 20%
Cost of Living Crisis Deepens as Consumer Inflation Rises +0.6% in August

News of the UAW starting strike actions against the Big Three automakers pressured somewhat Friday. However, the weakness in stocks today didn’t help Treasuries much, or did the understanding that consumers’ year-ahead and 5-year ahead inflation expectations came down in September. Global market “risk off” continues to gather momentum.

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

Friday/Week

  • 2-yr: +3 bps to 5.04% (+7 bps for the week)
  • 3-yr: +2 bps to 4.70% (+1 bp for the week)
  • 5-yr: +3 bps to 4.45% (+5 bps for the week)
  • 10-yr: +4 bps to 4.33% (+7 bps for the week)
  • 30-yr: +2 bps to 4.41% (+8 bps for the week)

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 4.33%, up +0.07% w/w (2.60-4.34) (new 10-year high intraweek w/e 9/15/23)
  • Credit spread 1.82%, unchanged w/w (1-yr range: 1.76-2.42)
  • BAA corporate bond index 6.09%, up +0.01% w/w (1-yr range: 5.28-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 7.29%, up +0.07% w/w (5.05-7.39) (new 20+ year high 8/25/23 w/e)

Yield Curve

  • 10-year minus 2-year: -0. 71%, down -0.01% w/w (1-yr range: -1.06 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.14%, up +0.06% w/w (1-yr range: -1.69 – 2.04) (new low)
  • 2-year minus Fed funds: -0.29%, up +0.06% 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:

Lower International Demand at 30-year Treasury Bond Auction Post CPI
U.S. 10-year Bond Auction Auctioned at Highest Yield at Auction Since 2007 Ahead of CPI
Softer Demand at 3-year Bond Auction in Another Week of Heavy Supply

Bond auctions week ahead:

Next week will bring some new supply.

  • Monday: 13- and 26-week bills
  • Tuesday: 42-day cash management bills; 20-year bond reopening
  • Wednesday: 17-week bills
  • Thursday: 4- and 8-week bills; 10-year Treasury Inflation Protected Securities

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit slipped $3.1bn last week to $8.062 TN.
  • Fed Credit was down $839bn from the June 22nd, 2022, peak.
  • Over the past 209 weeks, Fed Credit expanded $4.336 TN, or 116%.
  • Fed Credit inflated $5.251 TN, or 187%, over the past 566 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt increased $4.1bn last week to $3.435 TN.
  • “Custody holdings” were up $58bn, or 1.7%, 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.”

Central Bank Watch – Week Ahead Focus on FOMC, BOE, SNB, BOJ and PBOC

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates jumped 10 bps to 7.24% (up 122bps y-o-y).
  • Fifteen-year rates gained nine bps to 6.75% (up 154bps) – the high since 2002.
  • Five-year hybrid ARM rates rose nine bps to 7.01% (up 208bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 14 bps to 7.53% (up 135bps).
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

  • Greek 10-year yields jumped 12 bps to 4.07% (down 49bps y-t-d).
  • Italian yields rose 11 bps to 4.46% (down 24bps).
  • Spain’s 10-year yields gained 10 bps to 3.76% (up 23bps).
  • German bund yields increased six bps to 2.68% (up 23bps).
  • French yields rose eight bps to 3.22% (up 24bps).
  • The French to German 10-year bond spread widened two to 54 bps.
  • U.K. 10-year gilt yields fell seven bps to 4.36% (up 69bps).

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 jumped six bps to 0.715% (up 29bps y-t-d).

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

US Producer Prices Higher in August, Cost of Gasoline Surged 20%
Cost of Living Crisis Deepens as Consumer Inflation Rises +0.6% in August
Core PCE inflation Rises to +4.2% from 4.1% in July Keeping Fed Awake
FAO World Food Price Index Fell in March for Twelfth Consecutive Month

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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Real Time Economic Calendar provided by Investing.com.

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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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