U.S. Treasuries finished the week firmly in the green despite gave back some recent gains on Friday. The key CPI and PPI both came in mellower than expected giving the bond market strength. However better-than-expected Consumer Sentiment survey from the University of Michigan (actual 72.6; consensus 65.6) on Friday eventually sent all tenors to fresh lows in the early afternoon. Today’s pullback trimmed some of this week’s gains but yields on the 10-yr note and shorter tenors all fell more than 20 basis points for the week, compressing the 2s10s spread by two basis points to -91 bps. U.S. Treasuries completed three auctions this week, a $18 bln 30-yr bond reopening, $35 bln 10-yr note sale and a $40 bln 3-yr note sale.

Crude oil found resistance near its 200-day moving average (77.34), narrowing this week’s gain to $1.55, or 2.1%. Mirroring the move in yields the U.S. Dollar Index rose 0.2% to 99.93 Friday, but still lost 2.3% for the week.

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.

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

U.S. Treasuries finished the week firmly in the green despite gave back some recent gains on Friday. The key CPI and PPI both came in mellower than expected giving the bond market strength. However better-than-expected Consumer Sentiment survey from the University of Michigan (actual 72.6; consensus 65.6) on Friday eventually sent all tenors to fresh lows in the early afternoon. Friday’s pullback trimmed some of this week’s gains but yields on the 10-yr note and shorter tenors all fell more than 20 basis points for the week, compressing the 2s10s spread by two basis points to -91 bps.

U.S. Treasuries completed three auctions this week, a $18 bln 30-yr bond reopening, $35 bln 10-yr note sale and a $40 bln 3-yr note sale.

The 2-yr note yield declined 21 basis points this week to 4.73% while the 10-yr note yield fell 23 basis points to 3.82%. There could be residual activity around the week’s inflation reports before PCE lands post the next Fed meeting. The strong data and inflation falling is buoying the view that the economy will avoid a hard landing and that the Fed is close to being done raising interest rates.

Investment-grade corporate spreads traded Thursday at the narrowest level versus Treasuries since March.
High-yield spreads traded to the lows since April 2022.
Investment-grade CDS dropped to 63 bps, the low since February 2022.
High-yield CDS sank to 410 bps Thursday, the low since pre-bank crisis February 3rd.
JPMorgan CDS traded Friday at lows since February 2022,
BofA CDS at lows since March.
Leveraged Loan prices (Morningstar Index) surged this week to highs since August 2022.
The VIX (equities volatility) traded Thursday (13.12) near the lows since pre-pandemic January 2020 (closed Friday at 13.34).

Market financial conditions have become extraordinarily loose. The unwind of short positions continues to bolster liquidity. Friday’s reversal halted a major run in the Goldman Sachs Short Index, with a blistering 19% gain over 13 sessions (index up 31% y-t-d). The reversal of short positions and hedges provided powerful liquidity support this week throughout Treasury and fixed-income markets (MBS).

Sovereign yields were lower and led by US 2s decline post-CPI and a cumulative ½% lower since the July 6th peak and toward where they were three weeks ago. The lower yields pressured on the dollar this week, as the ECB and Bank of England are seen as having further to go with their rate-hike cycles.

The U.S. Dollar Index dropped a solid 2.4% this week to 99.96. With the lower greenback and soft-landing view commodity prices rose this week, including oil (+1.9%) and copper (+3.8%). Crude oil continued its move higher after it bounced off its 50-day moving average (71.29) last week, to find resistance from near its 200-day moving average (77.34), narrowing this week’s gain to $1.55, or 2.1%. Mirroring the move in yields the U.S. Dollar Index rose 0.2% to 99.93 Friday, but still lost 2.3% for the week after a 0.6% loss for the prior week.

American Consumer Sentiment Rises Sharply in July to Levels Last seen in September 2021

US Producer Price Disinflationary Trend Continues in June, Reprieve for Profit Margins

Consumer Inflation in June Eases, Evidence of Disinflation Encouraging Markets

Yield Watch

Friday/Week

2-yr: +12 bps to 4.73% (-21 bps for the week)
3-yr: +12 bps to 4.35% (-30 bps for the week)
5-yr: +10 bps to 4.03% (-31 bps for the week)
10-yr: +6 bps to 3.82% (-23 bps for the week)
30-yr: +3 bps to 3.92% (-11 bps for the week)

Key Rates and Spreads

Rates

10-year Treasury bonds 3.82%, down -0.24% w/w (1-yr range: 2.60-4.25) (12 year high)
Credit spread 1.85%, up +0.14 w/w (1-yr range: 1.76-2.42)
BAA corporate bond index 5.67%, down -.18% w/w (1-yr range: 5.00-6.59) (10 year+ high)
30-Year conventional mortgage rate 6.87%, down -0.27% w/w (1-yr range: 5.05-7.38) (new 20 year high)

Yield Curve

10-year minus 2-year: -0.94%, down -0.07% w/w (1-yr range: -1.06 – 1.59) (new 40 year low)
10-year minus 3-month: -1.58%, down -0.25% w/w (1-yr range: -1.69 – 2.04) (new low)
2-year minus Fed funds: -0.32%, down -0.07%

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

COT on bonds in week to July 3 showing the position breakdown between asset managers, dealer intermediaries and leveraged funds. The latter being the so-called fast group, as they tend to respond first to changes in the tech. and/or fund. outlook, holds an elevated short across the entire yield curve. Week to Monday July 3 (short week due to US holiday). @Ole_S_Hansen

Money Market Flows

Money fund assets have expanded an unprecedented $526 billion, or 51% annualized, over 12 weeks to a record $5.420 TN with one-year growth of $894 billion, or 19.7%. Such spectacular monetary inflation deserves serious contemplation.

Investment-grade bond funds posted inflows of $691 million, while junk bond funds reported outflows of $379 million (from Lipper).
Total money market fund assets declined $20.4bn to $5.454 TN, with a 18-week gain of $561bn (33% annualized). Total money funds were up $881bn, or 19.3%, y-o-y.
Total Commercial Paper jumped $15.9bn to $1.166 TN. CP was down $4bn, or 0.4%, over the past year.

The leveraged fund (Hedge funds, CTA’s etc.) position breakdown in 2’s and 10’s @Ole_S_Hansen

Bond auctions this week:

Soft Demand at US 30-year Treasury Bond Auction as Yields Fall

10-year Bond Auction Sees Lukewarm Demand with US Dollar Selling Off Since CPI Drop

Strong International Demand at 3-Year Treasury Bond Auction with High Yield 4.534%

Bond auctions week ahead:

Monday: 13- and 26-week bills
Tuesday: 52-week bills; 42-day CMB,
Wednesday: 17-week bills; $12 bln 20-yr Treasury bond reopening results at 13:00 ET
Thursday: 4- and 8-week bills,

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

Federal Reserve Credit declined $8.3bn last week to $8.260 TN.
Fed Credit was down $640bn from the June 22nd, 2022, peak.
Over the past 200 weeks, Fed Credit expanded $4.534 TN, or 122%.
Fed Credit inflated $5.450 TN, or 197%, over the past 557 weeks.
Fed holdings for foreign owners of Treasury, Agency Debt increased $5.2bn last week to $3.437 TN.
“Custody holdings” were up $71.1bn, or 2.1%, y-o-y.

Federal Reserve Leave Rates Unchanged as Expected. See 5.6% Fed Fund Rate at Year End

Central Bank Watch – Week Ahead Brings PBOC, South Africa, Turkey and Russia Rate Meetings

Higher for longer is a serious threat.

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.

Last week ahead of the CPI data and following the hot ADP report we had the following reaction. Was this a washout or the signal of more to come?

The iShares Investment Grade Corporate ETF (LQD) declined 1.01% Thursday, the largest loss since May 1st. The 2.40% loss for the week was the largest since February.
The iShares High Yield ETF (HYG) declined 0.73% Thursday, also the largest decline since May 1st. The 1.63% loss for the week, the worst weekly performance since early-March.
Friday Bloomberg headlines: “HYG ETF Daily Outflows $1.13 Bln, Biggest Move Since March 28th.” and “Two Giant Credit ETFs Hit by $2 Billion Exit on Hawkish Fed Bets.”

Global Yields Spiking Higher

UK 10-year yields were up 16 bps Thursday to 5.54%, with two-year yields surging as much as 18 bps to a 15-year high 5.54%. Reminiscent of last fall, UK yields were pulling global yields higher – even before the jolt from the ADP report.
Italian 10-year yields surged 21 bps Thursday (4.37%),
Greek yields jumped 18 bps (3.97%).
Ten-year yields rose 17 bps in Spain (3.70%) and Portugal (3.36%).

Canadian 10-year yields surged 30 bps this week to an eight-month high of 3.57%.
Australian 10-year yields jumped 23 bps this week to 4.26% – the high since January 2014.
New Zealand yields rose 22 bps to 4.85% – the high since July 2011.

Emerging Market (EM) bond yields reversed sharply higher.

The EM bond ETF (EMB) dropped 1.43% Thursday and 2.25% for the week – the largest daily and weekly losses since February. Ominously for “carry trade” levered speculation, EM bond losses were compounded by an abrupt rally in the Japanese yen. This week’s 1.46%-yen gain versus the dollar was the biggest since December.

Local currency yields

Hungary rose 33 bps (7.33%)
South Africa rose 32 bps (12.07%)
Mexico rose 25 bps in Mexico (8.93%)

Dollar denominated EM debt

25 bps in Chile (5.13%),
25 bps in Indonesia (5.05%),
25 bps in Colombia (8.26%),
24 bps in the Philippines (5.00%),
23 bps in Panama (6.04%),

Crude oil bounced off its 50-day moving average (71.29), rising toward its June high (75.06). With the pullback in yields the U.S. Dollar Index fell 0.9% to 102.28 through its 50-day moving average (102.92), resulting in a 0.6% loss for the week.

Highlights – Mortgage Market

Freddie Mac 30-year fixed mortgage rates rose 15 bps to an eight-month high 7.02% (up 151bps y-o-y).
Fifteen-year rates jumped 17 bps to 6.44% (up 177bps) – matching the high since July 2006.
Five-year hybrid ARM rates surged 16 bps to 6.60% (up 225bps) – the high in data back to 2005.
Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 20 bps to 7.14% (up 137bps).

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

Greek 10-year yields dipped one basis point to 3.94% (down 62bps y-t-d).
Italian yields dropped 19 bps to 4.17% (down 53bps).
Spain’s 10-year yields fell 15 bps to 3.53% (up 2bps).
German bund yields dropped 13 bps to 2.51% (up 7bps).
French yields fell 15 bps to 3.04% (up 6bps).
The French to German 10-year bond spread narrowed two to 53 bps.
U.K. 10-year gilt yields sank 21 bps to 4.44% (up 77bps).

Gilts Sold Reminds Us of Risk.

Post ADP, Pre-June CPI/PPI Dropped:

UK 10-year yields were up 16 bps Thursday to 5.54%, with two-year yields surging as much as 18 bps to a 15-year high 5.54%. Reminiscent of last fall, UK yields were pulling global yields higher – even before the jolt from strong U.S. data.
Italian 10-year yields surged 21 bps Thursday (4.37%),
Greek yields jumped 18 bps (3.97%).
Ten-year yields rose 17 bps in Spain (3.70%) and Portugal (3.36%).
Canadian 10-year yields surged 30 bps this week to an eight-month high of 3.57%.
Australian 10-year yields jumped 23 bps this week to 4.26% – the high since January 2014.
New Zealand yields rose 22 bps to 4.85% – the high since July 2011.

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. There was some nervousness in bond markets globally Thursday when British bond prices tumbled again on Thursday with concerns high inflation will force the Bank of England to carry on raising interest rates, with two-year gilts on track for one of the biggest weekly falls in 20 years.

Gilt yields were up on the day around 11 to 17 basis points (bps) over the range of maturities, adding to a similar jump on Wednesday as markets reeled from stronger-than-expected inflation data. Markets have repriced one more rate rise by the European Central Bank to 3.7 per cent from 3.5 per cent by October.

Highlights – Asian Bonds

Japanese 10-year “JGB” yields rose three bps to 0.40% (down 2bp 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 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 Price Disinflationary Trend Continues in June, Reprieve for Profit Margins

Consumer Inflation in June Eases, Evidence of Disinflation Encouraging Markets

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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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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