Brief Bond Comment
December 26, 2021 -Weekly
Did they get you trade / Your heroes for ghosts -Pink Floyd
Thirties and tens had fairly big jumps in yields this week as omicron seems to be discounted by the markets. The ten year yield ended at 1.491% up 9.1 bps on the week, and thirties at 1.905%, up 8.9. Tens started the year at 91 bps, peaked at 1.74% in late March, and have been capped by that high ever since, with a test of 1.70% in October and 1.67% in November. The thirty-year bond remains much closer to its low of the year, which occurred at the start of 2021 at 1.65%. The high in March was 2.45%. Since the March high, 30s have been in a flattening downtrend, and were capped in November with three highs between 2.02 and 2.03%. If 30s can close above 2.02% then a rapid move to 2.25 should ensue, which should put USH somewhere around 157 to 157-16.
The inflation picture is unambiguously bearish. The Fed’s preferred measure of inflation, Core PCE prices, accelerated to 4.67% last week. The FOMC’s four rotating regional President members will consist of a more hawkish group in 2022: Bullard of St Louis, Mester of KC, George of Cleveland and Bostic of Atlanta. The Fed has accelerated taper. It’s rarely as simple as relying on an obvious fundamental backdrop to take a position, but going into 2022, I think yields will make new highs.
Green energy and fossil fuels. Heroes for ghosts. Since the middle of the year, the ten year yield and crude oil prices have been fairly well correlated. The covid surge, along with Powell’s hawkishness, conspired to send both yields and oil prices lower in the beginning of September. However, those moves may end up being a mere pause of the stronger trend, especially in oil.
Last week featured a solid 20-yr auction. This week brings 2, 5 and 7 years, with $56b in 2s Monday, $57b in 5s Tuesday and $56b in 7s on Wednesday. Economic data releases are light.
| 12/17/2021 | 12/23/2021 | chg | ||
| UST 2Y | 64.0 | 68.6 | 4.6 | w/I 73.7 |
| UST 5Y | 117.3 | 124.0 | 6.7 | w/I 126.2 |
| UST 10Y | 140.0 | 149.1 | 9.1 | |
| UST 30Y | 181.6 | 190.5 | 8.9 | |
| GERM 2Y | -72.0 | -67.8 | 4.2 | |
| GERM 10Y | -37.8 | -24.9 | 12.9 | |
| JPN 30Y | 65.5 | 67.9 | 2.4 | |
| CHINA 10Y | 289.5 | 282.2 | -7.3 | |
| EURO$ H2/H3 | 81.5 | 85.0 | 3.5 | |
| EURO$ H3/H4 | 39.0 | 41.5 | 2.5 | |
| EURO$ H4/H5 | 5.0 | 6.0 | 1.0 | |
| EUR | 112.39 | 113.16 | 0.77 | |
| CRUDE (active) | 70.72 | 73.79 | 3.07 | |
| SPX | 4620.64 | 4725.79 | 105.15 | 2.3% |
| VIX | 21.57 | 17.96 | -3.61 | |
