Bond Traders Weekly Outlook: US Treasury Bonds Fall on Fed Higher for Longer

U.S. Treasury yields closed a down week on a modestly higher note Friday, backing down from overnight highs tempering some selling pressure in the stock market.  The pullback snapped a three-day skid in the 5-yr note and longer tenors, earlier selling briefly saw the 5-yr yield to its highest level since early November. The 2-yr note yield hit 4.71% overnight and settled the session down two basis points to 4.61%. The 10-yr note yield hit 3.92% overnight and settled down two basis points Friday to 3.83%. The week saw weak demand for the $15bln 20-yr bond sale. CPI, PPI and Retail sales also indicating “disinflation” is not running amok and that the U.S. economy is not falling off a cliff. As a reminder, bond and equity markets will be closed on Monday for Presidents Day.

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. Treasury bonds sold off this week, though by Friday afternoon the general tone started to shift, however, as market rates backed down from overnight highs.  Yields moved in tandem with the U.S. Dollar, the DXY touched a six-week high but returned to little changed at 103.85. The Index gained 0.3% this week.

The 2-yr note yield hit 4.71% Friday and settled the session down two basis points to 4.61%. The 10-yr note yield, hit 3.92% overnight, settled two basis points lower Friday to 3.83%. Friday trading snapped a three-day slide in the 5-yr note and longer tenors, overnight the 5-yr yield to its highest level since early November. This week’s action tightened the 2s10s spread by one basis point to -78 bps.

Fed rate hike expectations continued to creep higher with the implied likelihood of a third 25 bps hike in June increasing to 65.1% from 51.7% yesterday and 41.8% a week ago.

U.S. Treasuries saw the week’s lows Thursday night after hawkish comments from Cleveland Fed President Mester, but the market bounced just as the 10-yr yield approached its high from December (3.905%).

Inflation, Disinflation

We saw three key inflation reports this week, CPI, PPI and import and export price changes.

January’s CPI came in at 0.5%, the strongest in three months (in line with expectations). But with revisions, year-over-year consumer inflation of 6.4% was higher than the 6.2% expected. Clearly pricing pressures remain robust. The workings of “disinflation” stalled in goods pricing. Services prices increased 0.6%, Housing 0.8%, Food & Beverages 0.5%, and Transportation 0.4%.

January PPI rose 0.7% for the month, higher than the expected 0.4%, and the strongest monthly gain since June (December revised to negative 0.2% from negative 0.5%). PPI excluding food and energy rose a stronger-than-expected 0.5% (expectations 0.3%), while December core was revised to 0.3% from 0.1%. This put year-over-year PPI at 6.0% (expectations 5.4%), with ex-food and energy PPI up 5.4% (expectations 4.9%).

Import prices decreased 0.2% in January after decreasing a revised 0.1% (from 0.4%) in December. Excluding oil, import prices were up 0.3% after increasing 0.4% in December. Export prices increased 0.8% in January after decreasing a revised 3.2% (from -2.6%) in December. Excluding agriculture, export prices were up 0.8% after decreasing a revised 3.3% (from -2.7%) in December.

Retail Sales surged a stronger-than-expected 3.0% in January, a remarkable recovery from December’s 1.1% drop. Retail strength was notably broad-based, with robust gains in Vehicle sales (5.9%), Furniture (4.4%), Department Stores (17.5%), Eating & Drinking Establishments (7.2%), and Electronics (3.5%).

Disinflation was the new buzz word from the latest FOMC from Powell. Though of course that caused some trembles in the bond market Friday after the outlier jobs beat. Its a difficult one with the basis changes, seasonality and strikes how accurate that beat was. I can we won’t know until next month.

I will say that it is gratifying to see the disinflationary process now getting underway, and we continue to get strong labor market data.” “So, I would say it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market. But I would also say that that disinflationary process that you now see underway is really at an early stage.”

Chair Powell FOMC Feb 2023

Yield Watch

  • 2-yr: -2 bps to 4.61% (+10 bps for the week)
  • 3-yr: -2 bps to 4.32% (+12 bps for the week)
  • 5-yr: -1 bp to 4.04% (+12 bps for the week)
  • 10-yr: -2 bps to 3.83% (+9 bps for the week)
  • 30-yr: -2 bps to 3.89% (+6 bps for the week)
  • Investment-grade bond funds posted inflows of $1.194 billion, while junk bond funds reported outflows of $2.817 billion (from Lipper).
  • Total money market fund assets rose $10bn to $4.815 TN. Total money funds were up $265bn, or 5.8%, y-o-y.
  • Total Commercial Paper surged $29.5bn to $1.256 TN. CP was up $233bn, or 22.8%, over the past year.

Key Rates and Spreads


  • 10-year Treasury bonds 3.82%, up +0.19 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 1.88%, unchanged w/w (1-yr range:1.76-2.42)
  • BAA corporate bond index 5.70%, up +0.19 w/w (1-yr range: 3.97-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.80%, up +0.30% w/w (1-yr range: 3.67-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.80%, up +0.02% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.00%, up +0.09% w/w (1-yr range: -1.17 – 2.04) (new low)
  • 2-year minus Fed funds: +0.04%, up +0.17% 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 $25.9bn last week to $8.398 TN.
  • Fed Credit was down $503bn from the June 22nd peak.
  • Over the past 178 weeks, Fed Credit expanded $4.671 TN, or 125%.
  • Fed Credit inflated $5.587 Trillion, or 199%, over the past 535 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt last week rose $7.0bn to $3.332 TN.
  • “Custody holdings” were down $134bn, or 3.9%, y-o-y.

Rate markets now have peak Fed funds at 5.19% for the July 26th FOMC meeting, compared to the previous week’s 5.03% at the June 14th meeting.

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).
Mortgage News Daily February 17, 2023

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 nine bps to 4.28% (down 29bps y-o-y).
  • Italian yields gained nine bps to 4.30% (down 40bps).
  • Spain’s 10-year yields jumped 10 bps to 3.41% (down 11bps).
  • German bund yields increased eight bps to 2.44% (unchanged).
  • French yields rose seven bps to 2.90% (down 8bps).
  • The French to German 10-year bond spread narrowed one to 46 bps.
  • U.K. 10-year gilt yields jumped 12 bps to 3.52% (down 16bps). 

Where we got to in 2022:

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields added a basis point to 0.51% (up 9bps y-t-d).

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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