Was traveling yesterday
Friday Macros
Treasuries soared yesterday morning as strong hands forced weak hands into stops and short covering...10 years reached 1.248, but just missed the 200 day moving average of 1.23.. Similarly 5 years got close to the highs of the .90-.70 range we identified but could not get through... Now the treasury traders are focusing on the 96 billion of bonds they have to bid on Monday... So 10 years are exactly 10 basis back from the low yields of yesterday... So what is going on.
Even today one of the BB reports starts off by saying that treasuries had been responding to concerns about global growth amid the spread of Covid variants... While that is ongoing, that is not what the markets responded to... It was the classic too many shorts in the treasury/future space... And too much complacency in the equity markets... In what is always a low liquidity environment when there are not auctions.... But we stay with the flows mantra... And as far as the economy goes, recent slow downs are more related to supply chain issues... Try to buy a car or get what you want at Home Depot... As for inflation, just wait until you see the CPI YOY next week where the expectation is 5% and the PPI, where the YOY is 6.8%... We think the Fed is asleep at the wheel... Similar to what Larry Summers has been saying... And while some of the inflation includes the 50% increase in the Manheim used car index this year, which is transitory, we have yet to see the significant upticks in housing and increase of rents, that will be with us for years. And if you do not believe me, take a look as to what JP Asset Management, Black Rock, and Morgan Stanley Wealth are saying, and we quote for BB, " they think global growth is still on track, and second quarter earnings will bolster confidence. " and they have over 12 trillion of assets between them.
We watched an interview with Jay Barry , the JPM Treasury Strategist, who said yesterday on BB that the fair value of 10 years was 1.55... And he defended JPM year end call of 1.95%... We said similar when asked the question on BNN/Bloomberg yesterday saying 1.50 and 2% respectively... The flows were decidedly in the bulls favor the last 10 days... With 10 years going from roughly 1.60 to 1.248... But most commentators do not have long history in these markets... And missed the fact that we are finishing up an 18 day window of no treasury supply... That is a huge technical that now ends Monday...looking at positions, we observe that there are now more longs than shorts of about 3 to 1... So we will see how treasuries hold up in the auction... We are not predicting a quick reverse to 1.50... Need a catalyst for that, which we do not see at the moment.
Corporates.. Definitely saw widening yesterday but not significant to derail the supply train. We see a WSJ story saying that Junk yields are now below inflation... They claim that ,according to ICE BoA, bonds below investment grade average 4.54%, below the YOY of CPI of 5%... Just to be complete, we see BB HY at 3.67 and CCC at 5.48, so maybe the 4.54 is an average of the two... Either way yields are too low compared to current inflation... But we argued that above.
According to our friends at Janus, corporations alone had 5.2 trillion of cash, up 20% since the start of 2020. This is about TWICE THE SUM HELD DURING THE PAST 5 YEARS COMBINED. This tells us that corporations are building that safety zone and we should expect to see them unleash a flood of capital expenditure selling... And share buy backs and dividends
