Macro Commentary
Markets Quiet Overnight....Reallocations Extremely Large...7 year...Clarida
Not much of a range overnight in either US equity futures or treasuries, but since 6 am we have seen equities heading lower and bonds bid... We still think the overriding move is that rates are going higher, but the window is open for a bullish move until allocations get completed between now and next Wednesday, the end of the quarter...until then we expect more pressure in the equity space... Lets give it an overview.
Reallocations are going to be massive... And have been behind some of the moves we have already seen this week... Along with short covering in the rates space... First for private pensions, Merrill put out a report two days ago showing 88 billion of bonds have to be bought and equities sold... Their breakdown was 41 billion of treasuries and 44 billion of corporate bonds... To that end we have seen strong bid for corporates this week... Secondly, JPM put out a piece showing that Balanced Mutual funds are expected to sell 136 billion of equities to buy fixed income... Thirdly, the large sovereign wealth funds have some large reallocating to do, led by Japan's 1.6 trillion state pension fund, GPIF, will shift 44 billion from equities to bonds... And the Norwegian oil fund will move 70 billion to meet their targets... Our point being, this is some major shifting, so do not be surprised to see 10 years move to the low 1.50's and even to 1.47, but the rally will not last... April is one of the worst months for bonds and best months for stocks, so rate rises will continue
Rates today will be interesting... The first question everyone will ask is whether we will have another disastrous 7 year auction like last month.,.. We do not think so for the reasons pointed out above... 1.58 10 years will be the first resistance... Clarida is on tap today at 10.10, where he will support Powell's line of lower for longer and will not address tapering, twisting, or raising rates anytime soon... We still think Kaplan will be the one to watch to get a handle on rates from a clear headed Fed perspective, not influenced by politics,,, Bob Michele, CIO of JPM asset management, was out yesterday talking about 2% 10 years after the reallocation trades are completed... We tend to agree with him on this point, 2% and about done... While higher rates could follow we think about the potential for higher rates, but 1.95-2% is about near the top, even with some of the optics we expect to see in nonfarm in May and June of 1 million new jobs... Remember , one week from tomorrow, the bond market will be open only for the nonfarm payroll number and then close at noon...
Libor... NY state approved a measure to prevent contracts descending into chaos as Libor is phased out. The measure will allow existing contracts to use replacement indexes recommended by regulators . Federal legislation may still be needed according to what Powell testified in front of Congress.
Corporates had a solid day with 9 new issuers, making the week about 33 billion, which was the expectation for the week, and we still have 2 days left. One last thought, 5 year real yields are near important resistance right now, and that the signal for the next leg up in real yields will be when 5 year reals take out and close above the recent downtrend line... That is when we expect to see 2% 10's
Markets Quiet Overnight....Reallocations Extremely Large...7 year...Clarida
Not much of a range overnight in either US equity futures or treasuries, but since 6 am we have seen equities heading lower and bonds bid... We still think the overriding move is that rates are going higher, but the window is open for a bullish move until allocations get completed between now and next Wednesday, the end of the quarter...until then we expect more pressure in the equity space... Lets give it an overview.
Reallocations are going to be massive... And have been behind some of the moves we have already seen this week... Along with short covering in the rates space... First for private pensions, Merrill put out a report two days ago showing 88 billion of bonds have to be bought and equities sold... Their breakdown was 41 billion of treasuries and 44 billion of corporate bonds... To that end we have seen strong bid for corporates this week... Secondly, JPM put out a piece showing that Balanced Mutual funds are expected to sell 136 billion of equities to buy fixed income... Thirdly, the large sovereign wealth funds have some large reallocating to do, led by Japan's 1.6 trillion state pension fund, GPIF, will shift 44 billion from equities to bonds... And the Norwegian oil fund will move 70 billion to meet their targets... Our point being, this is some major shifting, so do not be surprised to see 10 years move to the low 1.50's and even to 1.47, but the rally will not last... April is one of the worst months for bonds and best months for stocks, so rate rises will continue
Rates today will be interesting... The first question everyone will ask is whether we will have another disastrous 7 year auction like last month.,.. We do not think so for the reasons pointed out above... 1.58 10 years will be the first resistance... Clarida is on tap today at 10.10, where he will support Powell's line of lower for longer and will not address tapering, twisting, or raising rates anytime soon... We still think Kaplan will be the one to watch to get a handle on rates from a clear headed Fed perspective, not influenced by politics,,, Bob Michele, CIO of JPM asset management, was out yesterday talking about 2% 10 years after the reallocation trades are completed... We tend to agree with him on this point, 2% and about done... While higher rates could follow we think about the potential for higher rates, but 1.95-2% is about near the top, even with some of the optics we expect to see in nonfarm in May and June of 1 million new jobs... Remember , one week from tomorrow, the bond market will be open only for the nonfarm payroll number and then close at noon...
Libor... NY state approved a measure to prevent contracts descending into chaos as Libor is phased out. The measure will allow existing contracts to use replacement indexes recommended by regulators . Federal legislation may still be needed according to what Powell testified in front of Congress.
Corporates had a solid day with 9 new issuers, making the week about 33 billion, which was the expectation for the week, and we still have 2 days left. One last thought, 5 year real yields are near important resistance right now, and that the signal for the next leg up in real yields will be when 5 year reals take out and close above the recent downtrend line... That is when we expect to see 2% 10's
