It was a wild ride for treasuries and the rest of fixed income yesterday... Treasuries start to the year is the worst in 20 years...We welcome the volatility... It all started with the CPI number and really accelerated when Bullard talked about 100 basis point rate rise before July 1 and extended his panic outlook by talking about an inter-meeting move, something that has not happened since 1994... Timaros of the WSJ was out this morning saying an inter-meeting move was not going to happen and brought up that Bullard, in an interview with the WSJ Monday, was much more dovish than his BB interview Thursday... Nonetheless a board meeting is scheduled at the Fed next Monday, and according to our friends at ITC, this is a normal occurrence... So who is right?... All we can tell you is we started to move some our personal money market and bank deposit paper into the 2 year last night at 1.60....
Fed... Will they move 4,5,6,7,8? Will they go 50?... The street is building a 3/1 scenario that the Fed goes 50 in March... Even our colleagues at Citi have now embraced that view... We still are in the 25 camp until we see the next PCI and the next CPI... We also are still in the camp of 4 rate hikes this year and not 7...GS sent out a piece last night that they have moved to 7... We read the last two Fed governors interviews last night, both Daly and Barkin, and we see no move in their minds to 50... But again it will be the March CPI that would be the nail in the coffin, or the refuting of the move... We still think 25 in March with an option of 25 in May... This is a DOVISH FED WITH POWELL AND BRAINARD LEADING...the street is way ahead of the Fed in our humble opinion.
Rates... 2 year broke through 1.48 which triggered our next support at 1.69 .. 5 years are at our support of 1.92, but they did break to 1.98 yesterday in the spike, so the next support is 2.11... As for 10 years, they held our support of 2.04 , with a short spike to 2.05... So 2.04 support stays, we have 2.125 after that and then all the way back to 2.33...so there is room for higher rates.. The curve remains flat but not inverted..7/10s are on top of each other but a real inversion would be 2/10 or 5/30's, flat but nowhere inverted for now...
Spread product did not do well yesterday... The proper technical term is UGLY...nonetheless The Fannie Mae 30-year current-coupon spread to the 5/10-year blend widened 7 basis points to +97 as the U.S. Treasury 10-year yield rose 9 basis points to 2.03% and volatility rose.
The spread increased the most in about 21 months
Corporate spreads widened about 3%... Only one new issue braved the markets... BB's posted their biggest one day loss in 20 months. The YTD losses for the sector are THE WORST ON RECORD AT DOWN 4.17%..yield jumped to a 16 month high of 4.53... The junk bond index yield rose to a new 15 month high of 5.55%
Equities...range bound overnight, coming back from the lows of 2 am... Japan was closed... But INFLOWS REMAIN BIG...US large caps attracted inflows of 34.1 billion in the last week...for the year to date, equity inflows total 153 billion, beating the 1 trillion pace of last year... Money is coming from credit and money market funds...so while the worst may not be over, there is good buying...
We will end with this question... The WSJ has a story today about Bank stress tests..The Federal reserve is asking banks to test how they would weather a hypothetical recession... The scenarios would be an increase of unemployment increase of 6% to 10% and a 40% decline in commercial real estate prices, widening corporate bond spreads, and a collapse in asset prices...including increased market volatility (which we have now)... So I know what some of my banker friends are going to say, "that is the standard the Fed uses"...ok... But we ask if the Fed has this type of concern, do you really think that Powell and Brainard are going to support 7 rate hikes this year? We say no and that the market is way ahead of the Fed...
