A Tumultuous Week Comes to a Close

  • We mentioned on Monday to tighten your seat belt as it could be a wild ride this week and that prediction certainly came true. The peculiar thing, however, is that with all the volatility this week has brought, the 10yr Treasury is practically back where it started the week. The current yield sits at 3.21% compared to 3.16% when the week opened.

 

  • Of course that rather docile view neglects the trip to 3.50% late Tuesday and another attempt to 3.49% in early Thursday trading, following the reverberations of the Fed’s 75bps hiking decision on Wednesday, (see graph below).

 

  • After that early foray near 3.50%, bids were found for the balance of the day pushing the yield to a low of 3.18% into Thursday’s close. It seems we have a new range for now, but we remember too when 3.20% represented the cycle high before this week, so don’t bet the mortgage that this range will hold for long.

 

  • Not much of consequence is on offer this morning in the way of updated economic data. Industrial Production for May is expected to soften but still be positive at 0.4% vs. 1.1% in April. The Leading Index is expected to slip a bit further into the red at -0.4% vs. -0.3% the prior month. As that index dips into negative territory it’s been a pretty good predictor of a coming recession so add that to your list of reports flashing at least yellow if not red.

 

  • Overnight, the Bank of Japan did not join the chorus of global central banks in tightening policy. Instead they kept stimulative rates and their yield curve caps in place which has weakened the yen even further. It sits at a 24yr low against the dollar. The volatility in our markets, along with the currency markets in general, has made currency hedging costs expensive and is a big reason, if not the reason, Japanese investors have not been bulking up on Treasuries despite the multi-year yield highs. If we get some calm in our markets and currencies stabilize the return of the Japanese investor to Treasuries could be a factor in keeping yields in check in the second half of the year. For now, however, they are sitting this one out.

 

  • With a three-day weekend calling and with most traders exhausted from the week’s events expect some quiet trading today before price discovery begins anew next week.

 

  • Fed speak will be hot and heavy next week led by Chair Powell’s semi-annual appearance before Congress on Wednesday and Thursday. Given the just completed FOMC meeting we don’t expect a different message to be delivered but it will be closely watched nonetheless for any additional hints at future policy moves.

10yr Treasury Yields For the Week

Source: Bloomberg

 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.13 3.38 3.46 3.60 3.76 4.22
0.50 3.12 3.35 3.40 3.49 3.61 4.11
1.00 3.12 3.32 3.37 3.44 3.52 3.98
2.00 – 3.31 3.31 3.37 3.40 NA
3.00 – – – 3.32 3.34 NA
4.00 – – – – 3.30 NA
5.00 – – – – 3.26 NA
10.00 – – – – – NA
Tags: Published: 06/17/22 by Thomas R. Fitzgerald