Bond Traders Weekly Outlook: US Treasury Yields Yearly Highs after Fed Mutterings

A busy week for bond traders after a tidal wave of global central bank monetary policy decisions headlined by the Fed’s FOMC, Bank of England, Norges Bank, and the Swiss National Bank together with a slew of global macro readings. U.S. Treasuries ended Friday with gains across the curve, reclaiming some of their losses after the FOMC reinforced the higher for longer mantra. 10-year Treasury bonds hit 4.48%, a new 15 year high intraweek. 30-Year conventional mortgage at 7.49% a new 23 year high intraweek. Credit spread 1.72%, down -.04% w/w (1.72-2.42) (new 1 year low).

We finished the week with the release of flash Manufacturing and Services PMI readings from major economies. Most of these readings showed ongoing contractions in both categories, with rare exceptions like Services readings from Australia (50.5), Japan (53.3), and the U.S. (50.2).

Hungry Bond Traders

Even with today’s rally yields finished at fresh weekly highs for the year and expanded the 2s10s spread by four basis points to -68 bps. Crude oil extended its bounce off a ten-day low, returning to little changed for the week, while the U.S. Dollar Index rose 0.2% to 105.61, gaining 0.3% for the week.

There is a firm belief the Central Banks have been 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 longer rates stay elevated the risk of a downturn increases. This is telling at the margin with more signs of consumer stress as higher borrowing costs and weaker hiring start to eat into household spending. With the Fed seen being close to its policy rate peak, next up is focusing on growth softening.

Understandably, aware of past Fed behavior markets are conditioned for loose conditions. They expect Fed loosening measures to reverse any meaningful tightening, hence constant flipping between end of inflation and hawkish Fed speaks trades.

Weekly Recap

A busy week for bond traders after a tidal wave of global central bank monetary policy decisions headlined by the Fed’s FOMC, Bank of England, Norges Bank, and the Swiss National Bank together with a slew of global macro readings. U.S. Treasuries ended Friday with gains across the curve, reclaiming some of their losses after the FOMC reinforced the higher for longer mantra. We finished the week with the release of flash Manufacturing and Services PMI readings from major economies. Most of these readings showed ongoing contractions in both categories, with rare exceptions like Services readings from Australia (50.5), Japan (53.3), and the U.S. (50.2).

  • 10-year Treasury bonds hit 4.48%, a new 15 year high intraweek.
  • 30-Year conventional mortgage at 7.49% a new 23 year high intraweek.
  • Credit spread 1.72%, down -.04% w/w (1.72-2.42) (new 1 year low).
  • Benchmark MBS yields traded as high as 6.33% intraday Wednesday, matching the high back to July 2007 before closing the week 12 bps higher at 6.17%.
  • Surging yields were not limited to Treasury and agency securities. Sovereign yields hit at least decade highs this week in countries including Canada, Germany, France, Spain, Sweden, Belgium, Austria, Netherlands, Australia, New Zealand, and Japan.

Even with today’s rally yields finished at fresh weekly highs for the year and expanded the 2s10s spread by four basis points to -68 bps. Crude oil extended its bounce off a ten-day low, returning to little changed for the week, while the U.S. Dollar Index rose 0.2% to 105.61, gaining 0.3% for the week.

Treasuries Friday rally came after the release of the U.S. flash PMI readings with 5s and longer tenors holding the bulk of their gains into the close while the 2-yr note backed off its morning high, but still recorded a solid gain. The market saw no meaningful shift in rate hike expectations even though Fed Governor Bowman (FOMC voter) said that she thinks that additional rate hikes will be appropriate while Boston Fed President (non-voter) Collins also said that additional tightening is still on the table. San Francisco Fed President Daly echoed the sentiment, though she is not an FOMC voter this year, but will be on next year’s Committee.

A few of the higher risk headlines for prices:

  • UAW Strike News of the UAW continuing and intensifying strike actions against the Big Three automakers pressures markets. Global market “risk off” continues to gather momentum.
  • Margin Calls

Key Catalysts that empowered latest Treasury sell off:

“Based on projected intermediate- to long-term borrowing needs, Treasury intends to gradually increase coupon auction sizes beginning with the August to October 2023 quarter. While these changes will make substantial progress towards aligning auction sizes with intermediate- to long-term borrowing needs, further gradual increases will likely be necessary in future quarters.”

August 11 – Bloomberg (Farah Elbahrawy and Greg Ritchie): “US Treasuries are on course for a record year of inflows as investors chasing some of the highest yields in months pile into cash and bonds, according to Bank of America… Cash funds attracted $20.5 billion and investors poured $6.9 billion into bonds in the week through August 9… Meanwhile, US stocks had their first outflow in three weeks at $1.6 billion. Flows into Treasuries have reached $127 billion this year, set for an annualized record of $206 billion, BofA said.”

September 19 – Reuters (Rodrigo Campos): “Global debt hit a record $307 trillion in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said… The financial services trade group said… global debt in dollar terms had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade. It said the latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336%. Prior to 2023, the debt ratio had been declining for seven quarters.”

Yield Watch

Friday/Week

  • 2-yr: -2 bps to 5.12% (+8 bps for the week)
  • 3-yr: -3 bps to 4.83% (+13 bps for the week)
  • 5-yr: -5 bps to 4.57% (+12 bps for the week)
  • 10-yr: -4 bps to 4.44% (+12 bps for the week)
  • 30-yr: -3 bps to 4.52% (+11 bps for the week)

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 4.43%, up +0.10% w/w (2.60-4.48) (new 15 year high intraweek) (9/23/23 w/e)
  • Credit spread 1.72%, down -.04% w/w (1.72-2.42) (new 1 year low) (9/23/23 w/e)
  • BAA corporate bond index 6.15%, up +0.06% w/w (1-yr range: 5.28-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 7.39%, up +0.10% w/w (5.05-7.49) (new 23 year high intraweek). (9/23/23 w/e)

Yield Curve

  • 10-year minus 2-year: -0.68%, up +0.03% w/w (1-yr range: -1.06 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.05%, up +0.09% w/w (1-yr range: -1.69 – 2.04) (new low)
  • 2-year minus Fed funds: -0.22%, up +0.07% w/w.
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Money Market Flows

  • Investment-grade bond funds posted inflows of $2.063 billion, while junk bond funds reported outflows of $416 million (from Lipper).
  • Total money market fund assets dipped $7.0bn to $5.636 TN, with a 28-week gain of $742bn (28% annualized). Total money funds were up $1.051 TN, or 22.9%, y-o-y.
  • Total Commercial Paper surged $23.0bn to $1.184 TN. CP was down $44.8bn, or 3.6%, over the past year.

Bond auctions this week:

Solid Demand at 20-year Treasury Bond Auction Heading into FOMC

Bond auctions week ahead:

Next week will bring some new supply.

  • Monday: 13- and 26-week bills
  • Tuesday: $48 bln 2-yr Treasury note auction results at 13:00 ET
  • Wednesday: 17-week bills 2-Year $49 bln 5-yr Treasury note auction results at 13:00 ET
  • Thursday: 4- and 8-week bills; $37 bln 7-yr Treasury note auction results at 13:00 ET

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit dropped $59.2bn last week to $8.003 TN.
  • Fed Credit was down $898bn from the June 22nd, 2022, peak.
  • Over the past 210 weeks, Fed Credit expanded $4.276 TN, or 115%.
  • Fed Credit inflated $5.192 TN, or 185%, over the past 567 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt declined $0.45bn last week to $3.434 TN.
  • “Custody holdings” were up $49.6bn, or 1.5%, y-o-y.

Powell at the FOMC: : “I guess it’s fair to say that the economy has been stronger than many expected, given what’s been happening with interest rates. Why is that? Many candidate explanations. Possibly a number of them make sense. One is just that household balance sheets and business balance sheets have been stronger than we had understood, and so that spending has held up and that kind of thing. We’re not sure about that.”

Federal Reserve Kept Rates at 22-Year High 5.25-5.50% Range as Expected

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates slipped a basis point to 7.23% (up 94bps y-o-y).
  • Fifteen-year rates declined seven bps to 6.68% (up 124bps).
  • Five-year hybrid ARM rates added a basis point to 7.02% (up 205bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up nine bps to 7.62% (up 107bps).
Mortgage News Daily

Global Bond Watch

Higher for longer is a serious threat.

Global Yields Spiking Higher

Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. This may well be a push over the cliff for troubled commercial real estate (CRE). Leveraged lending and leveraged finance gets more costly. Simply there are trillions of floating rate loans among individuals, speculators, businesses, and nations.

Major Benchmark 10-year Bond markets

Bond Market Performance 2023

Major 10-year Bonds/Notes

Highlights – European Bonds

  • Greek 10-year yields rose 10 bps to 4.17% (down 39bps y-t-d).
  • Italian yields jumped 13 bps to 4.59% (down 10bps).
  • Spain’s 10-year yields gained seven bps to 3.82% (up 31bps).
  • German bund yields increased six bps to 2.74% (up 30bps).
  • French yields rose seven bps to 3.29% (up 31bps).
  • The French to German 10-year bond spread widened one to 55 bps.
  • U.K. 10-year gilt yields dropped 11 bps to 4.25% (up 58bps).

The UK’s 10-year bond yields are the highest in the G7, as markets continue to worry about the extent of interest rate hikes that will be needed to bring inflation back under control.

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields jumped six bps to 0.715% (up 29bps y-t-d).

Key US Bond Auction Highlights

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.’”

Inflation, Disinflation

US Producer Prices Higher in August, Cost of Gasoline Surged 20%
Cost of Living Crisis Deepens as Consumer Inflation Rises +0.6% in August
Core PCE inflation Rises to +4.2% from 4.1% in July Keeping Fed Awake
FAO World Food Price Index Fell in March for Twelfth Consecutive Month

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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Real Time Economic Calendar provided by Investing.com.

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Sources: Scotia Bank, TC, FT

Note these charts, opinions, news, estimates and times are subject to change and for indication only. Trade and invest at your own risk.

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