Bond Traders Weekly Outlook: US Treasury Auctions Outperform Ahead of FOMC

U.S. Treasuries pulled back for the second consecutive day on Friday, resulting in a mixed finish for the week. Inflation watchers saw a milder PCE as expected while Japan’s Tokyo Core CPI rose 4.4% yr/yr in January it was back on topic. The 10-yr note yield settled the week at 3.52%. The 2-yr note yield, which is most sensitive to changes in the Fed funds rate, settled at 4.21%. U.S. Treasuries completed this week’s spectacular note auctions with the $35 bln 7-yr note high yield of 3.517%, which stopped through the when-issued yield by 2.1 bps.

The Bank of Canada raised the target for its overnight rate by 25bps to 4.50% in January 2022, as expected. The move follows the aggressive hikes at the last four meetings. Next Wednesday’s FOMC meeting is pivotal. Especially following recent comments from Fed officials, markets are confidently pricing in a slackening to a 25 bps rate increase. With the conspicuous loosening of financial conditions, markets are prepared for a more hawkish leaning Powell press conference.

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.

Weekly Recap

U.S. Treasuries pulled back for the second consecutive day on Friday, resulting in a mixed finish for the week. Inflation was on the backburner after a milder PCE as expected but after Japan’s Tokyo Core CPI rose 4.4% yr/yr in January it was back on topic. It was the sharpest rate of increase since 1981. On that, Japan’s prime minister said that domestic drivers of inflation are “feeble” and that a return to deflation should not be ruled out.

The 10-yr note yield hit 3.55% shortly after the PCE release, but settled the session at 3.52%. The 2-yr note yield, which is most sensitive to changes in the Fed funds rate, hit 4.24% after the release before pulling back to 4.21%.

This week’s action alleviated some pressure on the 2s10s spread, which widened by three basis points to -69 bps.

The PCE Price Index was up 0.1% month-over-month (consensus 0.0%) while the core-PCE Price Index, which excludes food and energy, was up 0.3%, as expected. That left the year-over-year changes at 5.0% and 4.4%, respectively, versus 5.5% and 4.7% in November.

The week saw two more strong auctions, the 5- and 7-year sales. Following strong 20-year offerings, $18 bln 30-yr bond reopening, an impressive 3-yr note sale. and the $32 bln 10-yr note reopening. The $35 bln 7-yr note high yield of 3.517%, which stopped through the when-issued yield by 2.1 bps over the past fortnight. The bid-to-cover ratio (2.69x) well above average (2.48x) while indirect takedown (international buyers) at 77.1%, the highest level since May. This followed the previous day’s 5-year sale which also stopped through strongly.

We are seeing a continuation of foreign buyers of US Treasuries stepping up purchases after JGB volatility and uncertainty in Europe with Russia. The fixed interest desk rated the auction an A. 

“Risk on” YTD

  • iShares Treasury Bond ETF (TLT) up 7.18% so far this month,
  • iShares Corporate Investment Grade ETF (LQD) up 4.81%,
  • iShares High Yield ETF (HYG) up 3.44%.

Yield Watch

  • 2-yr: +4 bps to 4.21% (+1 bp for the week)
  • 3-yr: +4 bps to 3.92% (+8 bps for the week)
  • 5-yr: +3 bps to 3.62% (+5 bps for the week)
  • 10-yr: +3 bps to 3.52% (+4 bps for the week)
  • 30-yr: +1 bp to 3.63% (-3 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 3.52%, up +0.03 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 1.88%, down -.01 w/w (1-yr range:1.76-2.42)
  • BAA corporate bond index 5.40%, up +0.02 w/w (1-yr range: 3.59-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.20%, up +0.09% w/w (1-yr range: 3.67-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.69%, up +0.01% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.16%, down -0.01% (1-yr range: -1.16 – 2.04) (new low)
  • 2-year minus Fed funds: -0.11%, down -0.05% 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 dropped $20.5bn last week to $8.447 TN.
  • Fed Credit was down $454bn from the June 22nd peak.
  • Over the past 176 weeks, Fed Credit expanded $4.720 TN, or 127%.
  • Fed Credit inflated $5.636 Trillion, or 201%, over the past 533 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt last week fell $9.9bn to $3.321 TN.
  • “Custody holdings” were down $137bn, or 4.0%, y-o-y.

Markets price in a 4.90% expected (near) peak Fed funds rate at the May 3rd FOMC meeting, dismissing committee members’ calls for a 5% plus “terminal rate.” Markets discount a Fed pivot and the policy rate down to 4.47% by year end.

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates rose seven bps to 6.02% (up 247bps y-o-y).
  • Fifteen-year rates slipped three bps to 5.15% (up 235bps).
  • Five-year hybrid ARM rates gained six bps to 5.47% (up 277bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 10 bps to 6.47% (up 269bps).
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)

Major Benchmark 10-year Bond markets

Bond Market Performance 2023

Major 10-year Bonds/Notes

Highlights – European Bonds

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

  • Greek 10-year yields rose 10 bps to 4.24% (down 32bps y-o-y).
  • Italian yields jumped 10 bps to 4.10% (down 60bps).
  • Spain’s 10-year yields gained nine bps to 3.23% (down 29bps).
  • German bund yields increased six bps to 2.24% (down 21bps).
  • French yields rose eight bps to 2.70% (down 28bps).
  • The French to German 10-year bond spread widened about two to 46 bps.
  • U.K. 10-year gilt yields fell six bps to 3.32% (down 35bps).

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)

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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