The Beatings Will Continue

  • It’s a new week but the market seems to be in the same frame of mind when we left off last week and that is selling early and often.

 

  • The 10yr yield reached a high of 3.20% in early trading today as April CPI looms on Wednesday as does another series of Treasury auctions during the week that will need to be put away. The previous cycle peak of 3.26% (hit on October 9, 2018) stands as the next obvious target of sellers. Since the 3.20% low earlier this morning prices have bounced a bit with the yield currently at 3.14%, so it’s not a totally one-sided market this morning. Buyers are returning to the short to intermediate part of the curve as we write so all may not be lost.

 

  • Selling in equities looks to continue, however, with most major foreign markets in the red and our futures pointing to triple-digit losses at the open. With the NASDAQ already in bear country, the S&P500 remains just under 7% away. The continued selling in risk assets is definitely tightening financial conditions. The Goldman Sachs Financial Conditions Index is at its tightest since mid-2020. So, the market continues to do the heavy lifting for the Fed after just 75bps in combined rate hikes to date.

 

  • Part of what is driving yields to new highs lately is the thought that the Fed won’t be able to bring inflation down anytime soon and that higher price levels will become entrenched in expectations.

 

  • Any disappointment in Wednesday’s CPI data will be viewed in this regard but expectations are that prices will moderate. The overall YoY rate is expected to dip from 8.5% to 8.1% while the core rate (ex-food and energy) is also expected to ease from 6.5% to 6.0%. The market, however, is in a shoot first ask questions later mood but the period of peak inflation seems to have passed with the market trading on worst-case scenarios.

 

  • One example of that was the selling this morning came despite lower oil prices. It’s down $2.50/barrel this morning and off more than $12/barrel from its early March peak. Treasuries don’t need a reason to trade lower but when the moves lack some fundamental force they tend to be short-lived or reverse. We shall see.

 

  • One reason higher yields haven’t brought in  more dip buyers is that foreign buyers, namely the Japanese, have been largely absent. This stems from the higher currency hedging costs given our market volatility and stronger dollar. If those forces relent and hedging costs recede making Treasury yields more attractive to foreign buyers then that’s one avenue to finding some support. But for now, that support is lacking.

Source: Bloomberg


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 2.67 2.94 3.10 3.31 3.68 4.14
0.50 2.66 2.91 3.04 3.20 3.53 4.03
1.00 2.65 2.88 3.01 3.16 3.44 3.90
2.00 2.87 2.95 3.08 3.33 NA
3.00 3.03 3.26 NA
4.00 3.22 NA
5.00 3.18 NA
10.00 NA

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Published: 05/09/22 Author: Thomas R. Fitzgerald