U.S. Treasuries closed out April with solid gains across the curve. Gains came about after the Bank of Japan’s first policy statement under Kazuo Ueda. The BoJ made no changes to its ultra-loose policy, but it replaced a pledge to keep rates at or below current levels with guidance for continued yield curve control (YCC) with an aim of achieving the price stability target. Treasuries gained also after the March Personal Income/Outlays report showed a deceleration in the yr/yr PCE Price Index to 4.2% yr/yr from 5.1% in February while the core reading ticked down to 4.6% from 4.7%. This week’s action compressed the 2s10s spread by two basis points to -61 bps. The 2s10s spread narrowed by four basis points in April.
U.S. Treasuries completed this week’s note auctions with a weak $35 bln 7-yr note auction. We also had a $43 bln 5-yr note auction which met strong demand and a $42 bln 2-yr note C rated auction. The U.S. Dollar Index rose 0.2% to 101.68 to end the week little changed. The Index lost 0.9% in April.
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.
Treasuries booked gains across the curve this week. The 2-yr note yield fell 10 basis points to 4.06% and the 10-yr note yield fell 12 basis points to 3.45%. The 2s10s spread narrowed by four basis points in April.
U.S. Treasuries finished April with solid gains across the curve following the release of the Bank of Japan’s first policy statement under Kazuo Ueda. The BoJ made no changes to its ultra-loose policy, but it replaced a pledge to keep rates at or below current levels with guidance for continued yield curve control with an aim of achieving the price stability target.
Economic data this week showed signs of weakness, that said there was no clear signal that the economy is deteriorating rapidly. The advance Q1 GDP report missed on headlines with real GDP increasing at an annualized rate of 1.1% (consensus 2.0%) after increasing 2.6% in the fourth quarter. However, personal consumption expenditure growth accelerated in the first quarter to 3.7% from 1.0% in the fourth quarter.
The Fed favorite Personal Income/Outlays report for March showed a deceleration in the yr/yr PCE Price Index to 4.2% yr/yr from 5.1% in February while the core reading ticked down to 4.6% from 4.7%. The March Durable Orders report showed a 0.4% decline in nondefense capital goods orders in March.
Bank collapses were back on in force this week, The San Francisco-based First Republic Bank has lost nearly all of its value so far this year after tumbling 43% on Friday. FRC is said to be drawing bids from lenders JPMorgan Chase & Co. JPM and PNC Financial Services Group PNC, according to the Wall Street Journal late Friday night, citing people familiar with the matter. If regulators led by the Federal Deposit Insurance Corp. receive an acceptable offer by Sunday, it’s possible a new owner for First Republic could be announced early Monday.
First Republic’s first-quarter results earlier this week revealed that it had $104.5 billion of deposits in the first quarter, down by $72 billion over the prior three months. And that figure would have been worse without a dozen lenders injecting some $30 billion in deposits, including JPMorgan.
“Issuance from the Federal Home Loan Banks climbed as concerns about First Republic spurred member institutions to tap the system to shore up funding. FHLBs issued $33.3 billion of overnight and term discount notes Wednesday, in addition to another $9.266 billion in floating-rate notes… It also issued about $11 billion of discount notes via auction on April 25…”April 26 – Bloomberg (Alexandra Harris):
- Investment-grade bond funds posted outflows of $1.318 billion, while junk bond funds reported positive flows of $594 million (from Lipper).
- Total money market fund assets surged $53.8bn to $5.263 TN, with a seven-week gain of $369 billion. Total money funds were up $753bn, or 16.7%, y-o-y.
- Total Commercial Paper fell $13.1bn to $1.148 TN. CP was up $43.8bn, or 4.0%, over the past year.
Bond auctions last week:
- 2-yr: -3 bps to 4.06% (-10 bps for the week; UNCH in April)
- 3-yr: -4 bps to 3.78% (-12 bps for the week; -5 bps in April)
- 5-yr: -7 bps to 3.54% (-12 bps for the week; -7 bps in April)
- 10-yr: -8 bps to 3.45% (-12 bps for the week; -4 bps in April)
- 30-yr: -8 bps to 3.68% (-10 bps for the week; -1 bp in April)
Key Rates and Spreads
- 10-year Treasury bonds 3.43%, down -0.09 w/w (1-yr range: 1.66-4.25) (12 year high)
- Credit spread 2.17%, up +0.10 w/w (1-yr range: 1.76-2.42)
- BAA corporate bond index 5.60%, up +0.01 w/w (1-yr range: 4.84-6.59) (10 year+ high)
- 30-Year conventional mortgage rate 6.59%, down -0.07% w/w (1-yr range: 5.05-7.38) (new 20 year high)
- 10-year minus 2-year: -0.60%, up +0.03% w/w (1-yr range: -0.86 – 1.59) (new 40 year low)
- 10-year minus 3-month: -1.67%, down -0.07% w/w (1-yr range: -1.17 – 2.04) (new low)
- 2-year minus Fed funds: -0.83%, down -0.20% w/w
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 $32.4bn last week to $8.539 TN.
- Fed Credit was down $362bn from the June 22nd peak.
- Over the past 189 weeks, Fed Credit expanded $4.812 TN, or 129%.
- Fed Credit inflated $5.760 Trillion, or 205%, over the past 546 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt jumped $33.1bn last week to $3.371 TN.
- “Custody holdings” were down $91bn, or 2.6%, y-o-y.
It’s been six 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.
Now the cycle continues with First Republic.
Highlights – Mortgage Market
- Freddie Mac 30-year fixed mortgage rates declined five bps to 6.34% (up 124bps y-o-y).
- Fifteen-year rates added a basis point to 5.73% (up 133bps).
- Five-year hybrid ARM rates fell six bps to 5.77% (up 199bps).
- Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up a basis point to 6.94% (up 156bps).
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
Highlights – European Bonds
Ten-year government yields down significantly.
- Greek 10-year yields fell 13 bps to 4.16% (down 41bps y-o-y).
- Italian yields sank 18 bps to 4.18% (down 52bps).
- Spain’s 10-year yields dropped 16 bps to 3.36% (down 16bps).
- German bund yields fell 17 bps to 2.31% (down 13bps).
- French yields dropped 16 bps to 2.89% (down 9bps).
- The French to German 10-year bond spread widened about one to 58 bps.
- U.K. 10-year gilt yields declined four bps to 3.72% (up 5bps).
This all happened quickly…. just months ago we had:
Highlights – Asian Bonds
- Japanese 10-year “JGB” yields dropped eight bps to 0.39% (down 3bps 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
- Weak U.S. 7-year Treasury Bond Auction with 1.3 bps Tail Completes Week’s Offerings
- Strong Demand in 5-Year Treasury Auction which Stopped Through When-Issued 0.6 bps
- International Buyers Pick up 2-year Treasury Bond Auction Slack
- U.S. 20-year Treasury Bond Auction Saw Lower International Demand After UK and EU Inflation
- Solid Demand at US 30-year Treasury Bond Auction Following CPI and PPI Data
- Weak Demand in 10-year U.S. Treasury Bond Auction Following CPI Report
- Steady 3-Year Treasury Bond Auction with High yield 3.810% Right on When Issued Pricing
- Weak International Demand in U.S. 7-year Treasury Bond Auction Completes Week’s Offerings
- 5-Year Treasury Auction Attracts Strong International Demand
- Soft 2-year Treasury Bond Auction with 2.7bps Tail
- Tepid Demand at U.S. 20-year Treasury Bond Auction Ahead of Crucial FOMC
- Underperformance in US 30-year Treasury Bond Auction with SVB Financial Rout Impacting
- Weak 10-year U.S. Treasury Bond Auction with Rate Hike Expectations Higher
- Solid Demand at 3-Year Treasury Bond Auction as 2s10s Tightened to Record -104bps
- Weak Demand in U.S. 7-year Treasury Bond Auction Completes Week’s Offerings
- 5-Year Treasury Auction Attracted Above Average International Demand
- Tepid Demand at U.S. 20-year Treasury Bond Auction Follows Last Week’s Series
- Weak Demand in US Long Bond Auction Caused Yields Spike to Highs of the Day
- Heavy International Demand in 10-year U.S. Treasury Note Auction Boosts Bonds
- Weak International Demand at Soft 3-Year Treasury Bond Auction Ahead of Powell Speech
- Strong U.S. 7-year Treasury Bond Auction with International Buyers Highest Since May
- Strong Demand at U.S. 20-year Treasury Bond Auction Follows Last Week’s Series
- Record Foreign Demand at US Treasury Bond Reopening Completes Strong Auction Week
- Solid International Demand in 10-year U.S. Treasury Bond Auction Ahead of CPI
- Strong International Demand at 3-Year Treasury Bond Auction
- Quiet U.S. 7-year Treasury Bond Auction as US Dollar Trades at Six Month Lows
- 5-Year Treasury Auction Attracted International Demand as Bonds Sold off
- Strong Demand at U.S. 20-year Treasury Bond Auction as Markets Wind Down for Christmas
- Meek Demand Seen in Long Bond Auction Despite Tamer CPI Report
- Weak 10-year U.S. Treasury Bond Auction Ahead of CPI and FOMC
- Weak Demand for U.S. 7-year Treasury Bond Auction in Illiquid Holiday Market
- 5-Year Treasury Bond Auction Softer than Strong Demand in 2-Year Sale
- Solid U.S. 20-year Treasury Bond Auction with Indirect Bidders Taking Down 75%
- US 30-year Treasury Bond Auction Meets Strong Demand After Cooler Than Expected CPI Report
- Dismal 10-year U.S. Treasury Bond Auction Following Mid Term Elections
- Safe Haven Buying at 3-Year Treasury Bond Auction with US Mid Term Elections and Cryptocurrency Collapse
- Weak Demand for U.S. 7-year Treasury Bond Auction as Growth Markets Shake
- Solid 5-year Treasury Bond Auction After Big Tech Stock Earnings Misses
- Dismal U.S. 20-year Treasury Bond Auction as US 30 Year Fixed Mortgage Rate Hits 20 Year High 7.22%
- 10-year U.S. Treasury Bond Auction Lackluster Demand Ahead of Tomorrow’s CPI
- Foreign Buyers Stayed Away from 3-Year Treasury Bond Auction
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.
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.