U.S. Treasuries added to their losses Friday while sovereign debt also retreated. Treasuries widened their losses in reaction to the Personal Income/Outlays report for January, which showed the Fed’s favorite indicator PCE Price Index accelerated from the December level. There were other strong economic reports including a much stronger-than-expected Services PMI (8-month high), New Home Sales for January and an upward revision to the final reading of the University of Michigan Consumer Sentiment. The 5-yr yield saw its highest level since early November while yields on the 10-yr note and the 30-yr bond finished near this week’s highs. The 2-yr note underperformed this week, resulting in additional pressure on the 2s10s spread, which compressed by five basis points for the week to -83 bps.
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.
The market is now pricing peak Fed funds at 5.40% for the June 24th FOMC meeting, up 12 bps this week and 56 bps since February 2nd. Expectations for the December meeting policy rate jumped 22 bps this week (up 88bps in three weeks) to 5.28%. Market pricing now has consecutive rate increases at the March, May and June FOMC meetings, with about a 20% probability for a 50-bps hike next month.
U.S. Treasuries on Friday saw more selling across the curve, while sovereign debt also retreated. Treasuries widened their losses in reaction to the Personal Income/Outlays report for January, which showed a smaller than expected increase in income, but spending grew more than expected and the PCE Price Index accelerated from the December level. We also saw the release of better-than-expected New Home Sales for January and an upward revision to the final reading of the University of Michigan Consumer Sentiment.
Treasuries 5-yr yield rose to its highest level since early November while yields on the 10-yr note and the 30-yr bond finished near this week’s highs. The 2-yr note underperformed this week, resulting in additional pressure on the 2s10s spread, which compressed by five basis points for the week to -83 bps.
We had two tepid bond auctions. We saw a weak $35 bln 7-yr note auction. The sale drew a high yield of 4.062%, which tailed the when-issued yield by 1.5 bps. The bid-to-cover ratio (2.49x) and indirect takedown (65.5%) were below average. It appears the strong interest from foreign buyers of US Treasuries has mellowed off this month. The fixed interest desk rated the auction a C-. Yesterday treasuries completion of a $43 bln 5-yr note auction met mediocre demand. The desk gave a B rating on the auction.
The core personal consumption expenditure price index (Core PCE prices) in the US, which exclude food and energy, rose by 0.6% versus 0.4% expected. Last month 0.4% revised up from 0.3%. The annual rate, the Federal Reserve’s preferred gauge of inflation came in at 4.7% vs 4.3% expected, noticeably the 4.4% prior revised up to 4.6%. The markets recognized that there isn’t disinflation in this report. There is inflation in it and reacted swiftly to fears of more aggressive Fed action.
- 2-yr: +9 bps to 4.78% (+17 bps for the week)
- 3-yr: +10 bps to 4.51% (+19 bps for the week)
- 5-yr: +11 bps to 4.21% (+17 bps for the week)
- 10-yr: +7 bps to 3.95% (+12 bps for the week)
- 30-yr: +6 bps to 3.94% (+5 bps for the week)
- Investment-grade bond funds posted inflows of $184 million, while junk bond funds reported outflows of $6.125 billion (from Lipper).
- Total money market fund assets increased $5.4bn to $4.820 TN. Total money funds were up $266bn, or 5.8%, y-o-y.
- Total Commercial Paper dropped $17.5bn to $1.238 TN. CP was up $218bn, or 21.4%, over the past year.
Key Rates and Spreads
- 10-year Treasury bonds 3.95%, up +0.13 w/w (1-yr range: 1.66-4.25) (12 year high)
- Credit spread 1.79%, down -0.09 w/w (1-yr range:1.76-2.42)
- BAA corporate bond index 5.74%, up +0.04 w/w (1-yr range: 3.97-6.59) (10 year+ high)
- 30-Year conventional mortgage rate 6.88%, up +0.08% w/w (1-yr range: 3.76-7.38) (new 20 year high)
- 10-year minus 2-year: -0.86%, up +0.06% w/w (1-yr range: -0.86 – 1.59) (new 40 year low)
- 10-year minus 3-month: -0.88%, up +0.12% w/w (1-yr range: -1.17 – 2.04) (new low)
- 2-year minus Fed funds: +0.23%, up +0.19% w/w.
10 Year Note Technical Analysis via KnovaWave
Highlights – Federal Reserve
- Federal Reserve Credit dropped $44.3bn last week to $8.349 TN.
- Fed Credit was down $552bn from the June 22nd peak.
- Over the past 180 weeks, Fed Credit expanded $4.622 TN, or 124%.
- Fed Credit inflated $5.538 Trillion, or 197%, over the past 537 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt rose $6.6bn last week to $3.353 TN.
- “Custody holdings” were down $105bn, or 2.8%, y-o-y.
Rate markets saw Fed rate hike expectations continued to creep higher and is now pricing peak Fed funds at 5.40% for the June 24th FOMC meeting, up 12 bps this week and 56 bps since February 2nd. Expectations for the December meeting policy rate jumped 22 bps this week (up 88bps in three weeks) to 5.28%. Market pricing now has consecutive rate increases at the March, May and June FOMC meetings, with about a 20% probability for a 50-bps hike next month.
Highlights – Mortgage Market
- Freddie Mac 30-year fixed mortgage rates rose 18 bps to a six-week high 6.34% (up 242bps y-o-y).
- Fifteen-year rates surged 26 bps to 5.67% (up 252bps).
- Five-year hybrid ARM rates gained 19 bps to 5.66% (up 268bps).
- Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 21 bps to a three-month high 6.80% (up 260bps).
Key Bond Auctions
- 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
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 to start the year.
- Greek 10-year yields rose nine bps to 4.37% (down 19bps y-o-y).
- Italian yields jumped 14 bps to 4.44% (down 26bps).
- Spain’s 10-year yields gained 10 bps to 3.51% (down 1bp).
- German bund yields rose 10 bps to 2.54% (up 9bps).
- French yields gained 11 bps to 3.02% (up 4bps).
- The French to German 10-year bond spread widened about one to 48 bps.
- U.K. 10-year gilt yields surged 14 bps to 3.66% (down 1bp).
Where we got to in 2022:
Highlights – Asian Bonds
- Japanese 10-year “JGB” yields were little changed at 0.50% (up 8bps y-t-d).
The yen dropped 1.3% in Friday trading, boosting the loss for the week to 1.7%. The dollar versus yen ended the week at 136.48, the high since Kuroda’s December 20th yield curve control (YCC) adjustment.
A Friday Reuters headline: “Japan’s Consumer Inflation Hits 41-year High, Keeps BOJ Under Pressure,” following data showing 4.3% y-o-y Nationwide CPI (10th straight month above 2%). Ueda, understandably, didn’t want to rattle markets with any hawkish talk.
February 24 – Bloomberg (Toru Fujioka): “Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment… Ueda said the BOJ should continue with stimulus for now, while flagging the need to consider returning to a normal policy approach if the outlook for prices clearly improved. He said it would still take some time to reach stable and sustainable inflation in Japan… ‘If I’m appointed BOJ governor, my mission isn’t to come up with some kind of magical, special monetary policy,’ Ueda said. ‘As I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll still take some time until we’ve securely achieved 2% inflation.’”
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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