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Bonds on the move as the ‘higher for longer’

 

The Name’s Bond...

Bonds on the move as the ‘higher for longer’ message hits home. The US 10yr Treasury yield advanced to a new 16-year high at 4.646%, whilst the 2yr was steady. As I noted last week the potential was for the long end to move and front of the curve to steady, producing steepening + volatility. The 2s10s spread has steepened to –0.51%, becoming way less inverted than the roughly –1% it was at a month ago. The market has consistently doubted the Fed – for good reason – but now is buying what the FOMC is selling in terms of the guidance. We can see this with the blowout in real rates with the 10yr TIPS up to 2.3%.

 

Stock and Awe

As for stocks – it’s all about bonds – sharp moves we are seeing creates volatility but also we would tend to think that as the 10yr advances further there will be more signs of stress across assets. We are seeing the broad US market breaking down at levels we expected it might, the question is how low and how long? The S&P 500 trades about 18x vs 15x when the 10yr was last at this level so we might expect further drawing down. I just don’t think the market is set for the kind of potential credit event that can take place. Here’s JPM’s Kolanovic: 

“...we are not saying that the situation now is the same as in 2007-2008 ... But signs of stress are beginning to appear... lags are longer this time, which has resulted in complacency and broad acceptance of the soft landing, or even no-landing, thesis”.

 

Euro Stocks and Job Jolts

European stocks are mixed but trend is definitely bearish; Wall Street was flat, closing off the lows with E-mini futures rejecting the 4,276 area yesterday. German inflation today, US unemployment claims later. These have trended lower for the last couple of months, suggesting there is ample strength in the labour market for the Fed to keep rates higher for longer. After peaking in June with three straight weeks in excess of 260k, weekly jobless claims have declined to around 220k lately, touching a 6-month low of 201k in the week September 16th. Fed chair Jay Powell is due to speak later as well.

 

Dollar Dips

The US dollar trades a little lower this morning after driving up to a fresh cycle high yesterday on those Treasury floating up. GBPUSD made a new low at 1.2110, EURUSD is testing the 1.05 area – key horizontal lows from Jan and Mar; whilst USDJPY pushed further into the 149 handle.  DXY heading for 11th straight weekly gain.

 

Oil Still Soaring; US Gov Shutdown on the Cards?

Oil continues to march higher to highest in more than a year with front month WTI touching $95 as crude inventories fell more than expected. Cushing stockpiles declined by 943k to their lowest level in more than a year, with the EIA reporting total US inventories dropped by 2.2m barrels in the week to September 22nd. Sense that delivery could be impacted by the decline at Cushing, which is feeding into widening timespreads as the curve remains heavily in backwardation – ie front month trades at a big premium to contracts further out, indicative of tight physical fundamentals and a market that just wants to go higher.

Three days to a US government shutdown. Aside from the spending implications, the Fed could be hobbled by delayed data. Meanwhile SEC Chair Gary Gensler warned the impending government shutdown could impede its oversight, 

"If a company were deciding to go public or raise offerings, they'd want to go effective before Friday if they're ready to. If not, they might be in a sort of subliminal state where they can't access the markets because we can't effectively review those".

Gold – new lows as real rates and USD drive higher – 10yr TIPS nudging 2.3%! That has doubled since 

April – market is buying higher for longer.

Gold – new lows as real rates and USD drive higher

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