Wednesday Macros
Treasuries Blow Through Resistance as Buyers Crush Shorts and Need FI
It is no longer the Fed moving markets at this time, but we will be watching the FOMC minutes today to see what the latest is on the tapering situation... The momentum currently is so far in favor of buying bonds that the Fed could fully taper and the markets would only blip at the worst... We have solidly gone through what we thought would be strong resistance at 1.36 in 10 years and could still reverse what we have done... But we now have the 1 percent bond geeks making the tape... HSBC being the latest... The flows continue to dwarf the sellers... Blame it on the pension funds,, who are now fully funded and are trying to rebalance equities with buying of bonds... The ageing demographics of the country (and worse for the rest of the world)...
Flows... The bond market continues to trade from the long side, but along with all the buying yesterday there is a short base that was forced to cover... We point out that there are some very significant call positions on the TY (10) treasury futures at both the 133.5 and 134 levels that have to be hedged as the 10 year gets close to the strike prices that will be expiring... Currently trading at 133-14... We expect that to be challenged as the 10 year approaches 1.28, our next resistance... We apologize to our readers as we really thought we would approach 2% 10 years before the Jackson Hole conference... We were wrong, although we have had the 5 year better pegged... We still think inflation is a major issue, but the players now believe the inflation, and the spike in the economy, has peaked and we will be facing a weaker economy next year with transitory inflation... we are not of that view
Flows 2... Our Head of Munis has been flogging the flows into Muni funds , which have been dwarfing the increase of supply... He has been correct...but what woke us up this morning was a story in the FT showing has much has been flowing into bonds. Net inflows into US bonds are far outpacing those for US equities, which goes against our view that inflation would be a severe negative impact for bonds. Bond mutual funds and etf's have added 372 billion as of June 23. This compares to 160 billion for equities, more than double. Bond funds are on pace to eclipse the 446 billion in 2020 and the 459 billion of 2019. Again, buyers are expressing the views that lofty stock valuations ,and ageing demographics (mentioned above) need steady retirement flows... What we question is why now?... When rates are so low and real rates are severely negative... We would rather pass and have limited interest in negative real rates...
Corporates came and went yesterday with 6.7 billion being priced... But spreads, which started tighter on the day, widened out as treasuries were rallying... Today they are opening unchanged... The demand for credit is still there and we expect the corporate bond issuance to be met with strong demand. But we are seeing some secondary sellers...
Swaps... Traders of short dated swaps are bracing for a slower Fed rate hike than markets are anticipating... The terminal rate has been falling since the 1980's with each cycle seeing a lower peak. Rates markets are priced for this to be repeated and for the Fed to set a glacial pace...
Tapering or not tapering is not the issue with the markets at the moment... July has great technical's for bonds because there is/was an 18 day window of no treasury supply... That will end next week... But not before we see new lows in treasury yields, not as low as last year or early this year, but lowest since February... Do not get lulled to sleep... We are here to try and make you money ... So while 10 year yields can go lower, we see a near term low as options expire... That should be the focal point... We do not think the economy is slowing down, we think we are seeing the supply chain issue making its way into the economy... This will be reversed... And inflation is here to stay...but countering the flows for the next two weeks, which may be the correct trade, will be choppy..this latest move is a technical move, exacerbated by the flows. FOMC minutes at 2PM
