Risk Repriced to Start off 2024

The first week of 2024 had markets scale back bets for the start of a rate cut cycle, simply markets had got ahead of themselves. U.S. Treasuries spent the week selling off as expected with the short covering and bonus enthused rally of 2023 fully sated for now. 2024 has flowed on from how U.S. Treasuries finished 2023, on a mixed note with longer tenors showing relative weakness while the short end underperformed into the impending three-day weekend. This week’s selling lifted yields across the curve by 14-17 bps, but the impact on the slope of the yield curve was limited since the 10-yr yield increased by just two more basis points than the 2-yr yield.

The price of crude oil finished near its highest level of the week. The U.S. Dollar Index at 102.41 gained 1.1% for the week in the Dollar’s best start to a year since 2011.

Hungry Bond Traders

With vulnerability quickly emerging at the “periphery”. MBS yields surged 24 bps during the first week of the year. MBS can be viewed at the “periphery of the core,” susceptible to shifts in market yield and liquidity expectations. MBS is also a bastion of leveraged speculation, hedging and derivatives trading. High yield CDS rose 15 to 371 bps, the largest move since October.

Risk repriced in Week One 2024

With vulnerability quickly emerging at the most vulnerable and stretched from short covering “periphery,” was hit. The US dollar index gained 1.1% to start the new year.

  • Emerging dollar bond yields surged +42 bps in Columbia, 42 bps in Turkey, 41 bps in Panama, 33 bps in Indonesia, 32 bps in Peru, 31 bps in Saudi Arabia, 27 bps in Chile, 27 bps in Brazil, and 22 bps in Mexico.
  • EM CDS jumped 14.5 this week to 182 bps, the largest one-week move since mid-August. After trading at a five-month high of 245 bps in October, EM CDS collapsed 78 bps to end the year at 167 bps.
  • “Periphery” currency were hit: the South Korean won declined 2.1%, the South African rand 1.7%, the Thai baht 1.7%, the Russian ruble 1.6%, the Malaysian ringgit 1.3%, the Chilean peso 1.3%, the Turkish lira 1.1%, the Polish zloty 1.1%, and the Taiwanese dollar 1.0%.
  • European bank (subordinated) CDS jumped 11.5 this week to 134 bps, the largest weekly rise in 13 weeks. After rising to a five-month high of 190 bps in late October, European bank CDS collapsed 67 to end 2023 at 123 bps.
  • European high yield (crossover) CDS surged 28.5 this week to 339 bps, the largest gain since the week of September 22nd (29bps). After trading to a seven-month high 473 bps in October, European crossover CDS ended the year 163 lower at 310 bps.
  • Peripheral European bonds pressured this week. Greek yields surged 26 bps (to 3.31%), Italian yields 15 bps (3.85%), Portuguese yields 15 bps (2.81%), and Spanish yields 16 bps (3.15%).
  • The UK bond market has evolved into a “susceptible periphery market”. Ten-year gilt yields surged 25 bps this week to 3.88%. UK two-year yields jumped a notable 27 bps to 4.23%.

Keeping an eye on the carry trade the Japanese yen what stood out the yen fell 2.5% to start 2024. China’s renminbi dropped 0.66% this week – the largest decline since early-September. Again, from Bloomberg: “Yen Closes Worst Week Since 2022 as Earthquake Shifts BOJ Calls.” Recall the yen rallied almost 8% in the final weeks of 2023, as perceptions of looser global conditions took hold.

Heading into money center bank earnings the US risk pricing wasn’t left untouched.

  • MBS yields surged 24 bps during the first week of the year. MBS can be viewed at the “periphery of the core,” susceptible to shifts in market yield and liquidity expectations. MBS is also a bastion of leveraged speculation, hedging and derivatives trading.
  • High yield CDS rose 15 to 371 bps, the largest move since October.
  • Bank America CDS jumped six this week to 75 bps, the largest weekly move since October.
  • Citigroup CDS rose seven to 70.5 bps, also the biggest increase since October.
  • This week’s rise in U.S. and European bank CDS collectively was the largest since October

Yield Watch

Friday/Week

  • 2-yr: -3 bps to 4.39% (+14 bps for the week)
  • 3-yr: -3 bps to 4.15% (+14 bps for the week)
  • 5-yr: +4 bps to 4.01% (+16 bps for the week)
  • 10-yr: +5 bps to 4.04% (+16 bps for the week)
  • 30-yr: +6 bps to 4.20% (+17 bps for the week)

Key Rates and Spreads

Rates

  • 10-year Treasury bonds 4.05%, up +0.18% w/w (1-yr range: 3.30-4.99) (new 15 year high 10/20/23 w/e)
  • Credit spread 1.59%, unchanged w/w (1-yr range: 1.54-2.42) (new 1 year low 12/7/23 w/e)
  • BAA corporate bond index 5.64%, up +0.18% w/w (1-yr range: 5.28-6.80) (14 year+ high w/w 10/20/23)
  • 30-Year conventional mortgage rate 6.75%, up +0.08% w/w (1-yr range: 6.07-8.03) (new 23 year high 10/20/23 w/e)

Yield Curve

  • 10-year minus 2-year: -0.34%, up +0.04% w/w (1-yr range: (-1.07 – -0.17) (new 40 year low)
  • 10-year minus 3-month: -1.33%, up +0.15% w/w (1-yr range: -1.89 – 0.21)
  • 2-year minus Fed funds: -0.94%, up +0.04% w/w.
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Money Market Flows

  • Total money market fund assets jumped $78.1bn to a record $5.985 TN, with a 43-week gain of $1.071 TN (26% annualized).
  • Money funds were up $1.173 TN, or 24.9%, y-o-y.
  • Total Commercial Paper dropped $55.4bn to $1.215 TN. CP was down $66bn, or 5.2%, over the past year.

2-, 10- and 30-Year Treasuries Technical Analysis via KnovaWave


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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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