It’s all about Treasury borrowing
October 30, 2023
******************
–From Reuters: The Treasury will release its quarterly borrowing requirements on Monday at 3 p.m. ET (1900 GMT) and its refunding news on Wednesday at 8:30 a.m. ET (1230 GMT).
–(BBG) The Federal Reserve’s policy statement is setting up to be the No. 2 event on Wednesday, with investor focus instead likely to be on the Treasury Department’s new borrowing plan, due hours ahead of the interest-rate decision.
–Deficits remain large and growing. Composition of sales will likely affect the curve.
–Bank of Japan tonight. US data today includes Dallas Fed Mfg, expected -15 from -18.1 last.
Was Q3 GDP the high point?
October 29, 2023
******************
Below is a chart of Dow Jones Transports. In the three months since the last day of July, it’s down 19% in the context of +4.9% real GDP and 8.5% nominal growth (Q3). Does that make any sense?
On Dec 30, 2022 DJT closed 13392. Friday 13556. Almost unchanged ytd. (YTD SPX +7.7% and Nasdaq Comp +21.7%). New lows in major airlines AAL, UAL, DAL, LUV, JBLU. Rails CSX and UNP are down 5.6% and 2.6% ytd. Landstar is at a new low, around flat on the year, while JB Hunt is down 4.8% ytd. FDX has bucked the trend, up about 30% on the year, but UPS has plunged to a new low, -23% ytd.
Going into Wednesday’s FOMC, what dominates? The supposed acceleration indicated by GDP, or the price action of transports? As Richmond Fed’s Tom Barkin said recently, the data don’t match what he is hearing from business contracts (softening conditions). The Fed is widely expected to hold rates at this meeting, and current pricing suggests the Fed is done, period. Lowest contracts on the curves are SFRZ3 at 9458.5 and FFG4 at 9459.5, only about 8 bps higher in yield than the current EFFR at 5.33%. Every contract from SFRH4 (9467.5) forward, is below current EFFR.
This is a big week. Bank of Japan, Quarterly Treasury Announcement, FOMC, Employment report.
The 10y JGB ended the week at a new high 87.5 bps, nearing the 1% hard cap. Expectations are that the BOJ will maintain the current cap, though an increase in the YCC cap to 1.5% is a possibility (Oct 31). Such a move would likely destabilize global bond markets further.
On Wednesday, Nov 1 at 8:30, the Quarterly Refunding Announcement is released. This report has taken on added significance in an era of surging deficits (though Yellen points to a strong economy rather than boatloads of supply as a key factor for higher long-end rates). At the October 12 thirty-yr bond auction the yield jumped after weak results (3.7 bps tail to 4.837, low bid/cover). At futures settle the 30y yield was 4.87%, up 14 on the day. The next 30y auction is November 9, preceded as always by threes and tens. On Friday the 30y yield was 5.02% at futures settle. (USZ3 109-16, WNZ3 112-17).
JOLTS also on Wednesday, expected to be 9265k vs 9610 last, from a high of 12027 in March 2022. The labor market is clearly decelerating. Many FOMC members have cited heightened uncertainties. While there will be no change in the FF target at the Wednesday afternoon meeting, I think Powell would like to maintain the option for further hikes, if for example, oil ramps up to new highs or other supply shocks develop. The Employment report is Friday.
The major risk going forward is a bear steepening curve accompanied by lower equities. After the 2004/2006 hiking cycle, the high yield in the 30y was ultimately 5.40% in June 2007. This cycle high has been 5.11% so far. Note that major banks continue to make new lows, hinting that the March ‘regional banking crisis’ was just a dry run. As an illustration, the chart below includes Citi, BofA, Morgan Stanley and Goldman. The box captures March turmoil. All four examples are below March lows.
OTHER THOUGHTS/ TRADES
On Bloomberg, the syntax has changed for constant maturity contracts. ED17 used to be the first gold euro$ contract. Now SFR18 is the first gold, currently SFRZ’27. This contract settled 9563.5, its low settle in October was 9544. The yield associated with 9563.5 is, of course, 4.365%. It’s a lower yield than anything on the treasury curve. My experience is that blue/gold SOFR calendars move directionally with 10/30 on the treasury curve. I watch the first red to the first gold as a (very rough) proxy for 2/10. Currently, 2/10 is -17 and SFRZ4/SFRZ7 is -20. The point is that the first gold, (1st contract, 5 years forward), does not trade like a five-year treasury. It has a much longer duration.
In a broader context, it’s worth looking at midcurve puts on blues and golds. Every contract from SFRH’25 to SFRH’28 is between 9590 and 9558, a fairly flat forward curve. Five percent golds? Why not.
| 10/20/2023 | 10/27/2023 | chg | ||
| UST 2Y | 504.8 | 501.2 | -3.6 | |
| UST 5Y | 484.8 | 476.9 | -7.9 | |
| UST 10Y | 491.8 | 484.3 | -7.5 | |
| UST 30Y | 507.8 | 502.1 | -5.7 | |
| GERM 2Y | 312.2 | 303.7 | -8.5 | |
| GERM 10Y | 288.9 | 283.2 | -5.7 | |
| JPN 20Y | 163.1 | 166.4 | 3.3 | |
| CHINA 10Y | 270.6 | 272.0 | 1.4 | |
| SOFR Z3/Z4 | -78.5 | -85.0 | -6.5 | |
| SOFR Z4/Z5 | -39.5 | -46.5 | -7.0 | |
| SOFR Z5/Z6 | 9.0 | 10.0 | 1.0 | |
| EUR | 105.96 | 105.64 | -0.32 | |
| CRUDE (CLZ3) | 88.08 | 85.54 | -2.54 | |
| SPX | 4224.16 | 4117.37 | -106.79 | -2.5% |
| VIX | 21.71 | 21.27 | -0.44 | |
PCE Prices today
October 27, 2023
******************
–Real Q3 GDP was reported at 4.9% yesterday. Nominal 8.5%. Seems high, but with the gov’t churning out spending, perhaps it makes sense. Rate futures rallied. On Wednesday the ten year note rose 11.1 bps to 4.951% and yesterday that move was erased as the yield fell 10.9 to 4.842%. After a poor 5y auction Wednesday, yesterday’s 7yr was on the screws at 4.908 with solid bid/cover.
–Today PCE spending and income. PCE prices expected +0.3 on the month, with yoy PCE price expected 3.4 from 3.5, Core 3.7 from 3.9.
–Sofr calendar spreads declined. For example, the most inverted one-year spread is SFRH4/H5 at -95.5 (9466.5/9562.0). H4 was up 4.5 bps in price while H5 jumped 11.5. There are now only two 3-month calendars that indicate at least one quarter pct ease. SFRM4/U4 settled -26.5 (9488.0/9614.5) and SFRU4/Z4 -26.0 (9514.5/9540.5). So the market is targeting the middle of next year for the most aggressive easing, which is no longer very aggressive at all.
–Dollar/yen is holding above 150, was 150.39 late. Last October high was 151.95. BoJ meeting next week, where some expect an increase in the rate cap to 1.5%.
–November treasury options expire today. TYZ3 settled 106-11. On Wednesday there was a buyer of 40k TYX3 107.5 puts, which yesterday settled 1’10, intrinsic. That put has the most open interest in Nov, at 92.6k.
–Reports of US bombing raids on Syrian (Iran proxy) targets has oil up close to $2, CLZ3 85.09 last.
It’s FINE. I hedged with futures
October 26, 2023
******************
–Stocks slid yesterday with SPX -1.4%. However, treasuries continued to push higher in yield in a bear steepener. 2y up just over 5 bps to 5.12% while tens rose 11 bps to 4.95% and 30s +12.5 to 5.086%. According to prelim CME sheets, open interest exploded across the treasury complex:
TU +24k
FV +89k
TY +38k
UXY +15k
US +19k
WN +8.5k
Sort of funny that Ackman had sparked a bond rally by saying that he had exited shorts a few days ago, but now there are huge new positions as yields soar. There is a large deep-in put trader driving some of the action. Yesterday, Week-4 Wednesday TY 108.5 puts were exited in a sale of approx 45k at 2’53. TYZ3 settled 105-215, so those puts were 2 53/64 in-the-money. On Friday, November treasury options expire, and the same guy bought 50k TYX3 107.5p for 1’53. These puts have nearly 1.0 delta. Huge trades. Latter buy >$70 million.
So TYX3 107.5 puts added 40k in open interest and the TY contract added 38k (full hedge). Attached chart shows open interest (lower panel) and price of the Wed 108.5p. 40k bought on Friday and exited yesterday.
–There were a couple of large SOFR option trades as well. Buyer 20k SFRU4 9625/9725cs 12.0 to 12.25. Settled 11.75 ref 9506. Buyer 40k SFRM4 9475/9450/9412.5/9362.5 put condor 8.75/9.0, settled 8.75 vs SFRM4 9481.5.
–Five year auction poorly received yesterday with yield 4.899 vs 4.88 just prior. Bid/cover just 2.36 vs over 2.5 at the last one. Today, the seven-year is auctioned.
Q3 GDP is expected 4.3%. Probably the last of the positive surprises the admin can crow about. However, there was an interesting comment by McConnell, that the Ukraine conflict is building up the US industrial base (to make weapons) while no Americans are getting killed in Ukraine. Here’s the link. It’s astonishingly depressing. Weapon manufacturer to the world, but we can gingerly sidestep the negative consequences. The logical extension is that we should start more wars…
https://twitter.com/NorthmanTrader/status/1717120808697344459
–ECB this morning.
–I saw a headline this morning that Morgan Stanley (new low for the year yesterday) was facing challenges in its wealth management division. The investing public has already become acquainted with Treasury Direct, pulling money out of low yielding bank deposits and going into t-bills. How about the “wealth managers”? SPX up about 9% (before fees) on the year and looking vulnerable. Or do I just avoid the volatility and fees and take 5.1% on two-year notes?
–On a grander scale, it’s not really the Fed that has “lost credibility”. It’s the Federal Gov’t. That, to me, is the implication of rising yields. The Fed is simply boxed in.
Banks down. Butter up.
October 25, 2023
*******************
–Curve flattened as 2’s were auctioned and PMI Composite was stronger than expected at 51.0. 5’s today, preceded by New Home Sales this morning. Weakest contract on the strip was red June, SFRM5, down 8.5 to 9571.0. Ten year yield unch’d at 4.84%.
SFRM4 -3.0 to 9484.5, SFRM5 -8.5 to 9571.0, SFRM6 -4.0 to 9578.0 and SFRM7 -1.0 to 9569.0. Every contract from June’25 back is around 4.3%.
–What is interesting is that the regional banking turmoil of March culminated at new lows in KRE (the regional banking ETF) in May. Not coincidentally, that’s when treasury yields were scraping new lows, with the 10y at 3.3% (vs yesterday at 4.90%). Currently KRE is not below May’s low of 34.52 (closed 38.71) but it is still down 40% from the February high. In an echo of regional banking issues, PacWest fell 5% yesterday. What is probably of more concern currently is the price action of several TBTF banks: BAC at a new low for the year, down 31% from the year’s high in Feb. Same with MS, new low, down 29% from Feb high. Same with Citi, down 27%. GS down 20% at a new low.
–We know there’s a Fed put with respect to TBTF banks. Just somewhat surprising that new lows in some of these names are met with a yawn.
Chart is KRE in black and BAC in gold. (bigcharts.com)
–My property tax jurisdiction is Cook County. The second installment of the year’s payment was moved to December a few years ago, so that sticker shock would come AFTER the election. So now the due date on the second installment is December 1. My bill is up 13.5% from last year. Not exactly disinflationary.
–On the old CME trading floor, I believe it was once a week around 10:30 that the loudspeakers would blare, “Is there any more trading in BUTTER?” It only traded for a few minutes. Well, I hope we all bought some as the attached chart shows a new high of 3.50/lb. Another product that isn’t responding to the Fed’s rate hikes. Of course, olive oil has more than doubled in the last year, from $4300/metric ton to $9400 now.
https://www.supplychaindive.com/news/butter-prices-record-high-ice-cream-milk-dairy/697359/
Short Cover
October 24, 2023
******************
–Outside range reversal day in USZ3 and TLT as Ackman said he covered bond shorts, in part due to geopolitical risks, and Bill Gross warned of recession in Q4 (today’s Eurozone PMI only 46.5). Monday morning high yield in the ten year surpassed 5% at 5.02, but by futures settlement it was down to 4.84%; TYZ3 settled 106-155 vs a low of 105-12+.
–Two-year auction today with yield on wi 5.03% at yesterday’s settle. News includes Philly Fed Services and S&P PMIs. MSFT and GOOGL earnings. FOMC one week from tomorrow with FFX3 now pinned to 9467. An ease of 25 would be a price of 9492. FFN4 (july) is 9485 and FFQ4 (aug) is 9499.5, so that’s the window now being priced. The low settle on the FF strip is FFG4 (feb) at 9457.5.
–SOFR strip flattened with SFRM4 unch’d at 9487.5, M5 +9.0 at 9579.5 and M6 +11.0 at 9582.0. SFRU4 9512.5^ settled 103 ref 9515.0 settle. B/E around 9410 to 9615 or 5.9% to 3.85%.
..
Don’t you understand what I’m trying to say
Can’t you feel the fears I’m feeling today?
If the button is pushed, there’s no runnin’ away
There’ll be no one to save with the world in a grave
Take a look around you boy, it’s bound to scare you, boy
And you tell me
Over and over and over again, my friend
How you don’t believe
We’re on the eve of destruction
Continued pressure on bonds
October 23, 2023
******************
—New low in the USZ3 contract this morning at 107-12. Friday’s settle was 108-15. Ten year yield closing in on 5%. TYZ3 105-15 vs Friday settle 106-00.
–Equity futures were higher last night (Sunday) but ESZ3 printing 4232.0, -16.5 (around 5:30 EST). Shanghai Comp currently down around 1.5% (new recent low).
–Friday featured a steeper curve, with the 2y yield down 8 bps to 5.082% while 30’s fell only 1.3 to 5.078%. New highs in back SOFR calendar spreads. While the red/green SOFR pack spread (2nd vs 3rd year forward) still is inverted around -12.0 (9560/9572), greens to blues and blues to golds are both positive and increasing. Green/blue +10.0 (9572/9562) and blue/gold +16.0 (9562/9546). I used rounded levels to keep numbers simple. Reds are 2nd yr forward (Z4, H5, M5, U5), greens are 3rd, blues are 4th, golds are 5th.
–This week features 2, 5 and 7 year auctions starting tomorrow.
High long treasury rates achieve 1)Restraint on inflation 2)Headwind against stock gains leading to consumption 3)Crowding out of private sector borrowing 4)Accommodation for domestic buyers to fund the deficit
October 22, 2023 – Weekly comment
***************************************
It has been an extraordinary rise in the US ten year yield since May. The low in May was 3.34% and Friday it was 4.92%, a surge of 158 bps. The largest retracement over that period was in July, from 4.07% on July 7 to 3.75% on July 19, 32 bps. This week the yield was up 29 bps while the two-year yield was up just 3 bps to 5.082%. 2/10 treasury spread closed at a new high for the year at -16.4, up 26 on the week!
The ‘wait-and-see’ message by Fed officials regarding the November 1 FOMC, punctuated by Powell’s comments last week, caused FFX3 to settle exactly at the Fed Effective Rate of 5.33%. In other words, by the end of the week no Fed action was priced for the November meeting. FFF4 settled 9462 or 5.38%, indicating a 20% chance of a hike at the December meeting.
As everyone knows, and as Powell overtly stated (again) last week:
It’s not a secret. We know that we’re on an unsustainable path fiscally. It’s not that the level of the debt is unsustainable. It’s not. It’s that we’re – the path we’re on is unsustainable, and we’ll have to get off that path sooner rather than later.
There was also an interesting speech from Richmond Fed President Tom Barkin last week. He noted unevenness in both the economy and pricing pressures. In perhaps an underappreciated aspect of inflation, he cited one of the draining aspects: “Inflation is exhausting. It takes effort to shop around for better prices or to handle complaints from unhappy customers.”
A couple of additional clips:
Supply chains have largely opened up. Labor force participation has rebounded. And gas prices have fallen from last year’s highs. [all three of those are again at risk]
The data will tell you that demand is not weak. GDP remains solid, growing 2.1 percent in the second quarter. S&P Global forecasts a remarkable 5.2 percent in the third quarter. That growth has been in no small part due to the consumer who has continued to spend down pandemic-era savings and benefit from higher wages and rising stock prices.
A Bloomberg article cites a lower Q3 growth expectation of 4.3%. Atlanta Fed’s GDP Now is 5.4%. (Q3 GDP release is Thursday). Barkin goes on to say that what he is “hearing on the ground” is a different drumbeat that shows slower growth, better balance in labor markets, and construction backlogs being worked down.
If you’re Powell, how do you navigate the path forward? The primary goal remains getting inflation to target. In part, referring back to subtle references by Barkin, that means throttling back both labor and stocks as a way to slow activity by both lower and higher-end consumers. But Powell must also feel some pressure to accommodate fiscal supply. As foreign buyers of US debt have pared back, in part to support their own weakening currencies, the Fed knows that the domestic buyer is left to fill the gaping deficit hole. A positive yield curve could go a long way in helping. What if the Fed continues to talk tough on raising the FF rate, but signals to major banks and asset managers that funding rates will be kept steady for the foreseeable future allowing the curve to go positive. Is Waller saying, “Clearly issuance has to impact yields” part of that messaging? Is the recent ‘news-plant’ focus on “term premium” part of that messaging? What if the Fed quietly promises banks NOT to invert the curve again? Domestic financial institutions would have an incentive to lever up and buy treasuries with positive carry. Higher long rates thwart inflation and siphon money out of stocks. Banks can re-build capital. It’s the positive side of ‘crowding out’ the private sector.
This week includes:
2,5,7 year auctions Tuesday, Wednesday, Thursday
Monday: Chgo Fed Activity
Tuesday: S&P PMIs
Wednesday: New Home Sales; Powell delivers brief opening remarks
Thursday: Q3 GDP
Friday: PCE spending and income. PCE prices yoy expected 3.4% with Core 3.7% from 3.9
OTHER THOUGHTS/ TRADES
My note last week focused on gold. GCZ3 went from 1941.5 to 1994.4 Friday to Friday, a rise of 2.7%. SPX fell 2.4% on the week.
I continue to watch SFRM6/SFRM7 spread. Last week I wrote: “Early in the week it traded 10.5 to 11.5 but settled at just 4.5. I still favor buying in the low single digits.” This week the low settle was 3.0 and Friday was 10.5. Still looking for a test of the year’s high at 19.
SFRH4 9550/9600/9637.5 broken fly settled 0.75, down from 1.5 last week.
BBG article notes that Subprime auto loans which are 60+ days overdue hit 6.91%, the highest since 1994.
| 10/13/2023 | 10/20/2023 | chg | ||
| UST 2Y | 505.2 | 508.2 | 3.0 | wi 505.0/04.5 |
| UST 5Y | 464.2 | 486.0 | 21.8 | wi 485.0/84.5 |
| UST 10Y | 462.7 | 491.8 | 29.1 | |
| UST 30Y | 477.7 | 507.8 | 30.1 | |
| GERM 2Y | 313.9 | 312.2 | -1.7 | |
| GERM 10Y | 273.7 | 288.9 | 15.2 | |
| JPN 20Y | 151.7 | 163.1 | 11.4 | |
| CHINA 10Y | 268.0 | 270.6 | 2.6 | |
| SOFR Z3/Z4 | -83.5 | -78.5 | 5.0 | |
| SOFR Z4/Z5 | -57.0 | -39.5 | 17.5 | |
| SOFR Z5/Z6 | -3.0 | 9.0 | 12.0 | |
| EUR | 105.11 | 105.96 | 0.85 | |
| CRUDE (CLZ3) | 86.35 | 88.08 | 1.73 | |
| SPX | 4327.78 | 4224.16 | -103.62 | -2.4% |
| VIX | 19.32 | 21.71 | 2.39 | |
In for a long slog
October 20, 2023
******************
–Wild volatility after Powell’s comments which resolved in a much steeper curve and lower equities. We’re faced with geopolitical tensions and continued inflation risks, coupled with signs that conflicts are going to expand. Biden’s speech was solid, but the prospect of steadfast military aid to Ukraine and Israel likely makes bondholders nervous in terms of budget implications, reflected in both higher yields and higher vol.
–The SOFR curve tells the story. The most positive contracts were June’24 and Sept’24, both up 6.0. So:
SFRM4, +6.0 to 9481.5
SFRM5, +2.0 to 9555.5
SFRM6, -6.5 to 9558.0
SFRM7 -11.0 to 9550.5
SFRM8 -12.5 to 9535.0
The treasury curve:
2y -5.3 to 5.163
5y +2.7 to 4.948
10y +7.8 to 4.978
30y +10.1 to 5.091 (high yield in 2007 after the 2004-06 hiking campaign to 5.25% was 5.4%)
Bear steepener. June’25 through June’28 are all essentially the same price around 4.5%. One might conclude that the Fed is somewhat handcuffed by fiscal dominance; geopolitical and economic uncertainties make it hard for the Fed to tighten in the short term, but the prospect of increased gov’t spending means the Fed will NOT be able to ease in a significant way for the foreseeable future. Is that the correct interpretation? I don’t know, but I do know that if forward earnings are discounted by 4.5% rather than 4% or lower, then equities face headwinds.
–2/10 new high -18.5 bps.
FIVE PCT
October 19, 2023
******************
–Tens appear to want to test 5% today as 20’s hit 5.25% yesterday before the auction. According to St Louis Fed the high ten-year yield in 2006 was 5.20% which followed the Fed’s 2004-2006 hiking campaign. Tens now 4.955% vs ending at 4.90% at yesterday’s futures settlement.
–Does this have something to do with it? From the Kobeissi Letter, “Total US debt has grown by ~$22 billion PER DAY for the last month… Since the debt ceiling “crisis” ended, total US debt is up over $2 trillion.” Sort of makes the $5 billion or so a month of supposed student loan debt pay-off look inconsequential.
–Powell speaks at noon today at the Economics Club of NY.
–While the Nov 1 FOMC has been taken off the table in terms of a hike, the December 13 meeting is showing increased odds. For example, yesterday FFX3/FFF4 spread settled 9 and had been 9.5 bid late in the day. (9465.5/9456.5). The Jan contract alone is 5.435%, 10.5 bps above the current EFFR…almost halfway there. However, in SOFR, Dec3/March4 spread is -6 (9452.0/9458.0). So, leaning for an end of year hike followed by bias for ease. Rarely does the market have perfect timing. Actually, on the FF curve both FFF4 and FFJ4 settled 9456.5, so at this point, the market leans toward ease AFTER Q1.
–Attached chart was from yesterday, 20yr yield at 5.25% exactly at lower band of FF target range, and just above the 2yr. A positively sloped treasury curve helps the banks…but not if long rates are so high that bankruptcies jump and lending is curtailed.
