Bond Traders Weekly Outlook: Treasuries Soar on Soft Data Ahead of CPI and Powell

U.S. Treasuries closed out the first week of 2023 in beastly form Friday following the December jobs report average hourly earnings growth moderating to 4.6% year-over-year from 4.8% in November. It is a key gauge for the Fed and front end led a broad-based rally fueled by short covering. The soft wages data had some kindling thrown on from ISM services and factory orders, both much weaker than anticipated. The US dollar concurred with the Bond market and weakened sharply against most major currencies after the reports.

It was a big move ahead of next weeks’ December inflation report, Fed Chair Powell’s speech at the Riksbank International Symposium, and the University of Michigan’s consumer sentiment report.

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 last year was insightful, “Bond Traders Dismiss Fed’s Hawkish Tone, Bet on 2023 Rate Cuts.”

Weekly Recap

The Treasury market had a flying start to the new year, highlighted by a 32 basis points decline in the 10-yr note yield to 3.56%. The 2s10s inversion had widened to 71 basis points (from 54 basis points at the start of the year) while the 3mo10yr inversion widened to 105 basis points (from 53 basis points at the start of the year). Friday’s dollar index told us much of the story. The U.S. Dollar Index, up 0.5% just before the employment report was released, was down 1.1% to 103.90 by the close.

The soft wages data had some kindling thrown on from ISM services and factory orders. The December ISM Non-Manufacturing Index also registered its first contraction reading (49.6%) since May 2020, and November factory orders (-1.8% m/m) were much weaker than expected with declines both durable goods and nondurable goods orders.

Friday’s Sobering Economic data and Fed Speak

  • US Added 223k Jobs in December as Wage Growth Softens
  • ISM Non-Manufacturing Index for December dropped to 49.6% (consensus 55.0%) from 56.5% in November.
  • Factory orders declined 1.8% month-over-month in November (consensus -0.4%) following a downwardly revised 0.4% increase (from 1.0%) in October
  • Richmond Fed President Barkin (non-voter in 2023) says more gradual rate hikes could limit harm to economy, according to Reuters
  • Atlanta Fed President Bostic (non-FOMC voter) said he has 5.00-5.25% for his projection and holding there “well into 2024.”
  • Fed Governor Cook (FOMC voter) says inflation far too high, but sees some encouraging signs.
  • 10-yr JGB hit the yield curve control ceiling of 0.50%; and the BOJ announced an unscheduled JPY300 bln 5-10yr purchase operation
  • Eurozone’s December CPI -0.3% m/m (expected +0.8%; last -0.1%) and +9.2% yr/yr (expected +9.7%; last +10.1%); December Core CPI +0.6% m/m (expected -0.1%; last 0.0%) and +5.2% yr/yr (expected +5.0%; last +5.0%)
  • Japan’s December Services PMI 51.1 (expected 51.7; last 50.3)

Yield Watch

  • 2-yr: -18 bps to 4.27% (-15 bps for the week)
  • 3-yr: -24 bps to 3.98% (-25 bps for the week)
  • 5-yr: -20 bps to 3.71% (-30 bps for the week)
  • 10-yr: -16 bps to 3.56% (-32 bps for the week)
  • 30-yr: -11 bps to 3.69% (-28 bps for the week)
  • Investment-grade bond funds posted outflows of $1.693 billion, and junk bond funds reported negative flows of $2.216 billion (from Lipper).
  • Total money market fund assets surged $78.6bn to $4.814 TN. Total money funds were up $111bn, or 2.4%, y-o-y.
  • Total Commercial Paper fell $17.3bn to $1.282 TN. CP was up $208bn, or 19.3%, over the past year.

Key Rates and Spreads


  • 10-year Treasury bonds 3.56%, down -0.32 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 2.18%, up +0.22 w/w (1-yr range:1.76-2.42)
  • BAA corporate bond index 5.74%, down -0.10 w/w (1-yr range: 3.51-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.20%, down -0.34% w/w (1-yr range: 3.52-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.70%, down -0.15% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.06%, down -0.56% w/w (1-yr range: -1.06 – 2.04) (new low)
  • 2-year minus Fed funds: -0.07%, down -0.17% 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 $4.9bn last week to $8.502 TN.
  • Fed Credit was down $399bn from the June 22nd peak.
  • Over the past 173 weeks, Fed Credit expanded $4.775 TN, or 128%.
  • Fed Credit inflated $5.691 Trillion, or 202%, over the past 530 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt jumped $9.4bn last week at $3.325 TN.
  • “Custody holdings” were down $90.4bn, or 2.6%, y-o-y.

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates added three bps to 6.44% (up 322bps y-o-y).
  • Fifteen-year rates declined three bps to 5.77% (up 334bps).
  • Five-year hybrid ARM rates fell nine bps to 5.53% (up 312bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 12 bps to 6.47% (up 311bps).
Mortgage News Daily November 4, 2022

Key Bond Auctions

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 fell 23 bps to 4.34% (up 282bps y-o-y).
  • Italian yields sank 47 bps to 4.23% (up 291bps).
  • Spain’s 10-year yields dropped 25 bps to 3.27% (up 262bps).
  • German bund yields fell 23 bps to 2.21% (up 225bps).
  • French yields dropped 26 bps to 2.72% (up 242bps).
  • The French to German 10-year bond spread narrowed about four to 51 bps.
  • U.K. 10-year gilt yields fell 20 bps to 3.47% (up 229bps).

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields jumped eight bps to 0.51% (up 37bps y-o-y)

Bond Market Performance 2022

Major Benchmark 10-year Bond markets

10 Year Bonds – Americas 2022 Performance

10 Year Bonds – Europe 2022 Performance

10 Year Bonds – Asia 2022 Performance

10 Year Bonds – Africa 2022 Performance

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.

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