Potential for a bearish breakout
September 17, 2021
–Stronger than expected Retail Sales sent yields higher. Got the magnitude right, but the sign wrong, +0.7% vs -0.7% expected. Tens rose 3 bps to 1.331%. The curve steepened slightly in dollars, although 5/30 edged to a new low just below 105 bps. In euro$’s the first five years of the strip net changes: whites -0.25, reds -2.125, greens -4.375, blues -6.0 and golds -5.25. Interestingly, in one-year calendars, reds to greens made new recent highs. I have attached a chart of EDU’22/EDU’23 which is the peak one-year calendar on the strip, having settled 64 yesterday. This is the last white to the last red, or the 4th to 8th quarterly. This period covers the libor cessation at the end of June 2023, so the spread is about 10 bps higher than it would be otherwise. The high in this particular spread has been 68.5 which occurred at the beginning of April. At the time it was in the slot of 6th to 10th, and the high of any one-yr calendar also occurred at that time with the 9th to 13th quarterly spread settling 78. So, back in April, about five and a half months ago, the steeper part of the curve was further back, which makes complete sense as the Fed was on full throttle accommodation. Now it’s less steep overall and the peak has moved closer in time as the market has bought into the transitory story, while the Fed has gently guided to a withdrawal of accommodation. Currently the 9th to 13th quarterly spread is Dec’23/Dec’24 and it is only 40 bps.
My only point here is that the bulk of the year’s range in U2/U3 has been 49 to 65, and a breakout to the upside would, in my opinion, be a bearish signal for fixed income in general.
