Bond Traders Weekly Outlook: US Completes Three Strong Auctions with Spectacular International Demand

U.S. Treasuries closed out the week on a lower note, after two days of strong gains around the December CPI report. Fed Chair Powell’s speech at the Riksbank International Symposium offered no anguish and a strong University of Michigan’s consumer sentiment report finished the week. The four-week bill yield jumped nearly 25 bps to 4.45% amid growing focus on the upcoming debt ceiling debate. The week saw three extremely strong auctions. $18 bln 30-yr bond reopening, $32 bln 10-yr note reopening, and an impressive 3-yr note sale. Major banks reported mainly better than expected Q4 earnings Friday with increased loan loss provisions.

The U.S. Dollar Index ended near a seven-month low, losing 1.7% this week. Treasury Secretary Yellen says the debt ceiling will be reached on January 19, prompting the Treasury to begin employing extraordinary measures that should prevent a technical default until the early June.

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.”

DoubleLine Founder. Gundlach: “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.”

Weekly Recap

U.S. Treasuries ended the week on a lower note, the 2-yr Treasury note yield rose nine basis points to 4.22% and the 10-yr note yield rose six basis points to 3.51%, with selling interest on Friday after a strong start to the year.  We had seen two days of strong gains around the release of the December CPI report.

US Consumer Services Inflation Still Rising, 7.5% in December from 7.2% in November

Friday saw relative weakness in shorter tenors, the four-week bill yield jumped nearly 25 bps to 4.45% amid a growing focus on the upcoming debt ceiling debate. Treasury Secretary Yellen said that the debt ceiling will be reached on January 19, prompting the Treasury to begin employing extraordinary measures that should prevent a technical default until early June.

Bond short covering has kicked off the year:

  • U.S. iShares Treasury Bond ETF (TLT) has surged 7.22% to begin the year
  • U.S. iShares Investment-Grade Corporate ETF (LQD) up 4.78% (largest 2-wk gain since April 2020)
  • U.S. iShares High Yield ETF (HYG) gaining 4.09%.

The week saw three extremely strong auctions. $18 bln 30-yr bond reopening, $32 bln 10-yr note reopening, and an impressive 3-yr note sale. Major banks reported mainly better than expected Q4 earnings Friday with increased loan loss provisions.

Major banks reported mostly better than expected Q4 earnings this morning, and their results were somewhat overshadowed by increased loan loss provisions.

The U.S. Dollar Index spent the day near a seven-month low, ending little changed at 102.20. The Index lost 1.7% this week.

Yield Watch

  • 2-yr: +9 bps to 4.22% (-5 bps for the week)
  • 3-yr: +8 bps to 3.89% (-9 bps for the week)
  • 5-yr: +7 bps to 3.61% (-10 bps for the week)
  • 10-yr: +6 bps to 3.51% (-6 bps for the week)
  • 30-yr: +5 bps to 3.62% (-7 bps for the week)
  • Investment-grade bond funds posted inflows of $6.557 billion, and junk bond funds reported positive flows of $2.510 billion (from Lipper).
  • Total money market fund assets slipped $8.9bn to $4.805 TN. Total money funds were up $131bn, or 2.8%, y-o-y.
  • Total Commercial Paper jumped $22.6bn to $1.304 TN. CP was up $257bn, or 24.5%, over the past year

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 3.50%, down -0.06 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 1.90%, down -.28 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 6.07%, down -0.13% w/w (1-yr range: 3.52-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.73%, down -0.03% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.12%, down -0.06% w/w (1-yr range: -1.06 – 2.04) (new low)
  • 2-year minus Fed funds: -0.30%, down -0.23% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

10 Year Note Technical Analysis via KnovaWave

Long Bond Yield

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.
Central Bank Watch – Korea Raises, BOJ Sequel to JGB, Dollar Yen Massacre Ahead

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates sank 26 bps to 6.18% (up 273bps y-o-y).
  • Fifteen-year rates fell 23 bps to 5.54% (up 292bps).
  • Five-year hybrid ARM rates declined four bps to 5.49% (up 292bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 19 bps to a four-month low 6.28% (up 277bps).
Mortgage News Daily November 4, 2022
Mortgage Rates Lower for 4th Week but Still Double from Year Ago

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 sank 23 bps to 4.10% (down 46bps y-o-y).
  • Italian yields dropped 21 bps to 4.01% (down 69bps).
  • Spain’s 10-year yields fell 10 bps to 3.17% (down 35bps).
  • German bund yields declined four bps to 2.17% (down 28bps).
  • French yields dropped nine bps to 2.63% (down 35bps).
  • The French to German 10-year bond spread narrowed five to 46 bps.
  • U.K. 10-year gilt yields dropped 11 bps to 3.37% (up 31bps).

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

  • 69 bps in Italy,
  • 46 bps in Greece,
  • 36 bps in Portugal,
  • 35 bps in Spain.
  • 35 bps in France
  • 28 bps in German
  • 93 bps in Hungary,
  • 86 bps in Poland,
  • 73 bps in Czech Republic,
  • 66 bps in Romania
Recession Fears Push German Yield Curve to Deepest Inversion Since 1992

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields jumped eight bps to 0.51% (up 37bps y-o-y)
  • 10 yr bonds down 43 bps in South Korea to start the year

Bond Market Performance 2022

Major Benchmark 10-year Bond markets

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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