Bond Traders Weekly Outlook: Treasuries Safe Haven Surges with SVB and Silvergate Collapses

U.S. Treasuries rose sharply Friday surge, which extended the market’s strong bounce that took shape on Thursday. Treasuries surged with growing uncertainty over SVB Financials’ future and a concern that the bank’s share price collapse could be indicative of a bigger issue in the banking system. FDIC announced the seizure of SVB Financials’ assets, making for the second largest bank failure in the history of the United States. Treasury Secretary Yellen said that the banking system remains resilient, but she also acknowledged that “a few” banks are being monitored by the Treasury Department. The 2s10s spread ended the week at -89 bps, widening by a sole basis point since last Friday.

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.

Weekly Recap

With SVB and SI collapses the Fed now faces a serious inflation problem, along with acute system fragility. Further tightening risks pushing the markets and economy over the proverbial cliff. On its own, the February jobs report was strong enough to solidify expectations for a 50-bps rate hike on March 22, but instead, rate hike expectations receded, with the implied likelihood of a 50-bps increase falling to 39.5% from 68.3% yesterday.

Not tightening ahead , with bond yields sinking Friday in anticipation of rate cuts and more QE, risks underpinning inflationary pressures. Rate markets market expectations are now pricing in 40 bps of rate cuts between June and December FOMC meetings. Months of “risk on” have exacerbated fragilities.

U.S. Treasuries rose sharply Friday surge, which extended the market’s strong bounce that took shape on Thursday. Treasuries surged with growing uncertainty over SVB Financials’ future and a concern that the bank’s share price collapse could be indicative of a bigger issue in the banking system. FDIC announced the seizure of SVB Financials’ assets, making for the second largest bank failure in the history of the United States. Treasury Secretary Yellen said that the banking system remains resilient, but she also acknowledged that “a few” banks are being monitored by the Treasury Department. The 2s10s spread ended the week at -89 bps, widening by a sole basis point since last Friday.

CDS Surge

  • Bank of America CDS surged 11 bps Friday (to 86bps), the largest daily gain since March 20, 2020. The 17 bps jump for the week was the biggest since June 2020.
  • Citigroup’s 8.4 bps Friday CDS increase was the largest since June 2022, with the 16.5 bps gain for the week the biggest since last September.
  • Morgan Stanley’s 18.8 bps Friday CDS surge was the largest since March 18th, 2020, with the 28.3 bps gain for the week the biggest since the panic week March 20, 2020.
  • JPMorgan’s 13.4 bps gain for the week was the largest since September 2022.

High-yield CDS jumped 23 bps Thursday, the largest daily increase since December (up another 19bps Friday). The 65-bps gain for the week was the largest since June 2020. Investment-grade CDS rose 12 bps this week, the biggest gain since September.

Bank Indices Sink

  • The KBW Bank Index sank 15.7% this week, the largest weekly decline since the 18.8% drop during covid panic week March 20, 2020.
  • The Nasdaq Bank Index dropped 16.1%,
  • The NYSE Financials Index this week fell 7.5%.
  • The Broker/Dealer Index (XBD) lost 9.3%.
  • The European STOXX 600 Bank Index dropped 5.0%, and the Hang Seng China Financials Index fell 5.1%.

Bond auctions this week:

Inflation, Disinflation

Food prices continue to fall after they were almost vertical after Russia invaded Ukraine. World food prices as measured by the FAO Food Price Index fell for the eleventh consecutive month in February. The index fell to 129.8 points in February 2023, down 18.7 percent from the record high 159.7 from March 2022. Sugar prices were the anomaly, they surged 6.9 percent, reaching the highest level since February 2017.

FAO World Food Price Index Fell in February for Eleventh Consecutive Month

Yield Watch

  • 2-yr: -29 bps to 4.59% (-27 bps for the week)
  • 3-yr: -28 bps to 4.28% (-32 bps for the week)
  • 5-yr: -27 bps to 3.95% (-30 bps for the week)
  • 10-yr: -23 bps to 3.70% (-26 bps for the week)
  • 30-yr: -17 bps to 3.70% (-19 bps for the week)
  • Investment-grade bond funds posted inflows of $717 million, and junk bond funds reported positive flows of $10 million (from Lipper).
  • Total money market fund assets were unchanged at $4.894 TN. Total money funds were up $318bn, or 7.0%, y-o-y.
  • Total Commercial Paper dropped $35.8bn to $1.179 TN. CP was up $140bn, or 13.4%, over the past year.

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 3.69%, down -0.27 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 2.09%, up +0.15 w/w w/w (1-yr range: 1.76-2.42)
  • BAA corporate bond index 5.78%, down -0.12 w/w (1-yr range: 4.20-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.76%, down -0.21% w/w (1-yr range: 4.29-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.89%, down -0.01% (1-yr range: -0.86 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.27%, up +0.36% w/w (1-yr range: -1.27 – 2.04) (new low)
  • 2-year minus Fed funds: +0.01%, down -0.27% w/w.
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit declined $27.5bn last week to $8.305 TN.
  • Fed Credit was down $596bn from the June 22nd peak.
  • Over the past 182 weeks, Fed Credit expanded $4.578 TN, or 123%.
  • Fed Credit inflated $5.494 Trillion, or 195%, over the past 539 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt increased $7.1bn last week to $3.360 TN.
  • “Custody holdings” were down $72.7bn, or 2.1%, y-o-y.

With SVB and SI collapses the Fed now faces a serious inflation problem, along with acute system fragility. Further tightening risks pushing the markets and economy over the proverbial cliff. On its own, the February jobs report was strong enough to solidify expectations for a 50-bps rate hike on March 22, but instead, rate hike expectations receded, with the implied likelihood of a 50-bps increase falling to 39.5% from 68.3% yesterday.

Not tightening ahead , with bond yields sinking Friday in anticipation of rate cuts and more QE, risks underpinning inflationary pressures. Rate markets market expectations are now pricing in 40 bps of rate cuts between June and December FOMC meetings. Months of “risk on” have exacerbated fragilities.

Central Bank Watch – Systemic Risk and The Federal Reserve

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates declined three bps to 6.71% (up 286bps y-o-y).
  • Fifteen-year rates rose 10 bps to 6.09% (up 300bps).
  • Five-year hybrid ARM rates added three bps to 6.00% (up 303bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 15 bps to 7.02% (up 267bps).
Mortgage News Daily February 17, 2023
30-year Mortgage Rates Soar Back to November Highs of 6.62%, Mortgage Applications Fall 13.3%

Key Bond Auctions

Bond auctions this week:

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

German bund yields are currently about 40 bps higher than November levels. UK 10-year yields ended the week at 3.85%, up 85 bps over the past month to the high since the October crisis period. Spanish and Portuguese bond yields this week surpassed November peaks to trade at new multiyear highs (Spain back to 2014 and Portugal to 2017).

European high-yield (“crossover”) CDS fell 22 this week to 397 bps, down from 523 bps on November 9th (September high 695bps).

Emerging Market (EM) CDS dropped 15 this week to 229 bps. This compares to 276 bps on November 9th (September high 346bps).

Ten-year government yields down significantly to start the year.

  • Greek 10-year yields fell 15 bps to 4.32% (down 25bps y-o-y).
  • Italian yields sank 21 bps to 4.32% (down 38bps).
  • Spain’s 10-year yields fell 12 bps to 3.54% (up 3bps).
  • German bund yields sank 21 bps to 2.51% (up 6bps).
  • French yields dropped 19 bps to 3.01% (up 3bps).
  • The French to German 10-year bond spread widened two to 50 bps.
  • U.K. 10-year gilt yields sank 21 bps to 3.64% (down 3bps).
German 10-Year Bunds at Weakest Level since July 2011 as Yield Curve Inversion Deepens

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields dropped 10 bps to 0.41% (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)
Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band

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.

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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