U.S. Treasuries continued the move from last week through Wednesday giving back most of those gains Friday resulting in a slightly higher finish for the week in most tenors. The long bond ended negative territory for the week while the 10-yr note and shorter tenors gave back most of their gains from Wednesday’s surge that sent yields on these tenors to levels not seen since September. Together with hopeful rhetoric Treasuries and European debt faced pressure at the end of the week. This week’s action tightened the 2s10s spread by another basis point to -72 bps. The U.S. Dollar Index slipped 0.2% for the week to 102.00.
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.
Last week DoubleLine Founder. Gundlach said; “My 40 plus years of experience in finance strongly recommends that investors should look at what the market says over what the Fed says.” and “There is no way the Fed is going to 5%. The Fed is not in control. The bond market is in control.”
The bond market faced four major events this week: the BOJ meeting, a 20-year reopening, the latest Fed Biege report and Japan’s CPI. Japan’s core CPI was up 4.0% yr/yr in December, representing the sharpest rate of increase since 1982.
- Federal Reserve Beige Book Highlights Housing Markets Continued to Weaken
- Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band
- Japan Inflation Hits 32 Year High in December
The week saw another strong auction, a 20-year offering following last week’s three extremely strong auctions. $18 bln 30-yr bond reopening, $32 bln 10-yr note reopening, and an impressive 3-yr note sale.
“Risk on” YTD
- iShares Investment-Grade Bond ETF (LQD) has already returned 4.86% YTD
- iShares High Yield Bond ETF (HYG) has returned 3.45%.
- iShares Treasury Bond ETF (TLT) has returned 6.67%.
- 2-yr: +8 bps to 4.20% (-2 bps for the week)
- 3-yr: +8 bps to 3.84% (-5 bps for the week)
- 5-yr: +8 bps to 3.57% (-4 bps for the week)
- 10-yr: +9 bps to 3.48% (-3 bps for the week)
- 30-yr: +9 bps to 3.66% (+4 bps for the week)
- Investment-grade bond funds posted inflows of $3.036 billion, and junk bond funds reported positive flows of $230 million (from Lipper).
- Total money market fund assets dipped $2.1bn to $4.803 TN. Total money funds were up $129bn, or 2.8%, y-o-y.
- Total Commercial Paper declined $3.5bn to $1.301 TN. CP was up $257bn, or 24.6%, over the past year.
Key Rates and Spreads
- 10-year Treasury bonds 3.49%, down -0.01 w/w (1-yr range: 1.66-4.25) (12 year high)
- Credit spread 1.89%, down -.01 w/w (1-yr range:1.76-2.42)
- BAA corporate bond index 5.40%, down -0.34 w/w (1-yr range: 3.51-6.59) (10 year+ high)
- 30-Year conventional mortgage rate 6.11%, up +0.04% w/w (1-yr range: 3.67-7.38) (new 20 year high)
- 10-year minus 2-year: -0.68%, up +0.05% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
- 10-year minus 3-month: -1.17%, down -0.05% w/w (1-yr range: -1.17 – 2.04) (new low)
- 2-year minus Fed funds: -0.16%, up +0.14% w/w
10 Year Note Technical Analysis via KnovaWave
Highlights – Federal Reserve
- Federal Reserve Credit declined $4.3bn last week to $8.467 TN.
- Fed Credit was down $434bn from the June 22nd peak.
- Over the past 175 weeks, Fed Credit expanded $4.741 TN, or 127%.
- Fed Credit inflated $5.656 Trillion, or 201%, over the past 532 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt slipped $1.0bn last week at $3.331 TN.
- “Custody holdings” were down $116bn, or 3.4%, y-o-y.
Highlights – Mortgage Market
- Freddie Mac 30-year fixed mortgage rates dropped 23 bps to a four-month low 5.95% (up 239bps y-o-y).
- Fifteen-year rates sank 36 bps to 5.18% (up 239bps).
- Five-year hybrid ARM rates declined eight bps to 5.41% (up 281bps).
- Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up nine bps to 6.37% (up 278bps).
Key Bond Auctions
- 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
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
Ten-year government yields down significantly to start the year.
- Greek 10-year yields increased four bps to 4.14% (down 42bps y-o-y).
- Italian yields dipped two bps to 3.99% (down 71bps).
- Spain’s 10-year yields declined three bps to 3.14% (down 38bps).
- German bund yields added a basis point to 2.18% (down 27bps).
- French yields slipped a basis point to 2.63% (down 36bps).
- The French to German 10-year bond spread narrowed about two to 45 bps.
- U.K. 10-year gilt yields were up one basis points to 3.38% (down 29bps).
Where we got to in 2022:
Highlights – Asian Bonds
- Japanese 10-year “JGB” yields dropped 13 bps to 0.39% (down 4bps y-o-y)
Bond Market Performance 2022
Major Benchmark 10-year Bond markets
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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