Bonds 05 (Sep 17 - Dec 24)

[winston]

"Higher for Longer" interest rate

Another factor was the "higher for longer" interest rate guidance by the Fed that normalised term premiums (10Y UST less Fed Funds Rate).

Term premiums should be positive, serving to compensate the risk and volatility in locking in your interest rates for a longer period.

The term premium has been negative (or inverting) for the past 10 months against its long-term average of around 100 bps.

Finally, real interest rates (Fed funds rate less core PCE) have started to steepen.

Central banks' tolerance for higher real interest may be due to the stickiness of recent inflation data despite their aggressive rate hikes.

Long-term real rates are around 150bps. Assuming the Fed hits its inflation goal of 2%, the fair value of 10Y UST is 4.5% (2% plus 150bps plus 100 bps).

We do find bonds attractive as we expect Fed to pause following Powell's recent comments that financial conditions have clearly tightened.

In addition, we think the growth in fiscal deficits will taper down from reduced social security payments and delayed tax collections from California.

US growth will also be dragged down by student debt repayment, higher interest rates and falling excess savings from the pandemic stimulus.

Source: Phillips

[winston]

Treasury yields are surging. Here's what history says might come next for the bond market.

by Phil Rosen

The yield on the 10-year Treasury is hovering close to 5%, the highest level in 16 years.

Strategists at Barclays this week said Fed policy isn't even very tight and rates won't fall soon.

Investors have been dumping US government bonds as the market adjusts to the outlook of interest rates being higher for longer.

History suggests that the yield that investors would be looking for would be somewhere between 1.9 and 2.1 times inflation expectations.

The current 10-year breakeven rate of 2.45% would therefore imply a corresponding nominal yield of between 4.7% and 5.1%."

There's a less than 1% probability, he says, that the 10-year Treasury yield climbs above 5.5% barring any significant revision higher in inflation expectations.

Markets are pricing in 98% odds of no hike at the Fed's November 1 meeting, and a 24% chance of a 25 basis point hike in December.

They could indeed breach 5.5% in 2024 and a potential government shutdown in November could be an additional factor that pushes yields higher.

Despite data continuing to show a resilient economy, the consensus still expects it to slow very sharply over the coming quarters.

Repeated misses beg the question whether the consensus has been overly confident about monetary policy being too tight.

We argue that policy is barely tight and risks are skewed towards continued upside surprises.

Source: Business Insider

https://finance.yahoo.com/news/treasury ... 02620.html

[behappyalways]

Biden Administration Runs Third-Largest Budget Deficit In History
https://www.zerohedge.com/political/bid ... it-history

[winston]

Flock Money

According to the Commitment of Traders Report from the CFTC, “non-commercial” traders have amassed a near-record short position in 10-year Treasury note contracts. In other words, these folks have placed a very big bet that long-term interest rates will continue rising.

Ironically, that’s a positive sign for the bond market. Whenever this particular group of speculators is leaning hard to one side of a particular trade, it usually pays to take the other side of that trade.

As a group, these traders are not exactly the “dumb money,” but they are certainly not the “smart money.”

I would call them the “flock money” because they tend to act like sheep, especially at the extremes of a particular market.

They flock toward the identical trade at the identical time. When that happens, the trade becomes “crowded” and a reversal usually takes place.

Source: Investor Place

[behappyalways]

Yields Might Have Long Way To Go To Seduce Buyers
https://www.zerohedge.com/markets/yield ... uce-buyers

[behappyalways]

Yields Jump After Gruesome 5Y Auction Prices With Biggest Tail In 15 Months
https://www.zerohedge.com/markets/yield ... -15-months

[behappyalways]

Washington Isn't Alone In Flooding The Market With Government Bonds: Beijing Is Doing It Too
https://www.zerohedge.com/markets/washi ... ing-it-too

[behappyalways]

Bond bullish continues. Would really like to see capitulation, but I am struggling to find it.
https://twitter.com/biancoresearch/stat ... 8117370304

[winston]

Bond market has fighting chance to avoid historic losing streak

By Liz Capo McCormick, Michael Mackenzie & Ye Xie

A prospect that might have seemed unthinkable just a couple short weeks ago is coming into view for bond traders: The potential for US Treasuries to post an annual gain for the first time since 2020.

Ten-year yields, a benchmark for global borrowing, fell about 25 basis points amid growing confidence that the Federal Reserve is done hiking interest rates, with the latest spark coming Friday on signs US job growth is cooling.

Source: Bloomberg

https://theedgemalaysia.com/node/688889

[winston]

The Easy Part of the 'Treasury Rally' Is Over

by Peter Tchir

The "easy" part of the Treasury rally is over. We could bounce around but I am looking for more weakness on the data side to push us below 4.3% on the Ten-year.

After the recent rally, we might drift higher in yields first and see some shorts get put on, but I think that we'll see 4.3%, before 4.75%.

The Treasury market moves will be mainly expressed five years and out as the Fed will be in no rush to cut rates. This implies that a bet on more negative curves is the direction to lean toward.

I continue to like credit here. Supply should slow into year end and I think many large institutional investors will overweight corporate bonds relative to treasuries because D.C. makes them more nervous than recession risks.

Stocks will likely follow earnings, yields, and may try to rally some more as we're about to be bombarded with "seasonal" effects (or at least the reporting will focus on seasonal effects).

I like stocks until we get to 4.3% on the 10-year, and then would be extremely nervous as we won't get there without greater recession concerns.

Source: The Street

https://realmoney.thestreet.com/stocks/ ... r-16137325