The ‘Proper Place’

The ‘Proper Place’

Thursday’s closely-watched (and that’s an understatement) seven-year sale was a good news, bad news affair.

Wait. That’s actually not as accurate as it needs to be. It was a bad news affair. I don’t love quoting Bloomberg’s Cameron Crise, but his short macro summaries (delivered throughout the trading day) are concise and therefore amenable to quotation. As regular readers can attest, “concise” is an adjective which, as far as I’m aware, has never been applied to my pen. As Crise put it, commenting on the seven-year auction, a 2.5bps tail “is pretty awful by any reasonable definition.”

Granted, but last month’s debacle not only defied “reason,” it managed to render the English language largely insufficient. “Train wreck” was about the best anyone could do. When “train wreck” is the bar to clear, “pretty awful” counts as good news.

Once you got past the headline, the stats weren’t terrible, though. In contrast to what unfolded on February 25 (one of the most chaotic days for rates in recent memory), there was no immediate cause for alarm on Thursday, although futures volume did spike following the lackluster sale.

Considered with this week’s two- and five-year offerings, it’s probably safe to say that the rates panic has subsided. But there was still a bit of anomalous action on Thursday (a “flash” event in ultras just after 10 AM in New York) and unfortunately for market participants who prefer to avoid such things, rates are going to remain topical for the foreseeable future, whether it’s Fed pricing or something as straightforward as the equity risk premium discussion.

That said, supply jitters may take a backseat to the data — well, other than the incessant background chatter about how to “pay for” Joe Biden’s forthcoming infrastructure proposal.

“Following the seven-year auction, we are entering a rare period in the Treasury market of two consecutive weeks devoid of coupon supply, which, in keeping with our bullishness, will clear the way for a focus on the fundamentals to dictate trading,” BMO’s Ian Lyngen and Ben Jeffery said Thursday. “The deluge of Fedspeak this week has painted an optimistic picture on the path out of the pandemic, with the acknowledgment that the labor market still has a great distance to travel before reversing the damage,” they added, noting that “this sets the stage for next week’s jobs report to be highly consequential in determining the next leg for Treasurys.”

It feels like things want to settle into a range, but there’s no shortage of commentary suggesting that the market won’t be ready to rest until 10s reach 2%. There’s nothing magical about 2%. And yet, for some, that’s seen as a level consistent with a kind of compromise between markets and the Fed.

“We’re first likely to see some consolidation in the 1.5-1.75% range as quarter-end brings rebalancing in multi-asset class accounts, flows from pension funds and insurance companies taking advantage of the higher yields and flows from Japan,” JPMorgan Asset Management CIO Bob Michele said Thursday. After that, though, 2% is the “proper place” for 10s, Michele reckoned.

If that ends up bringing real yields up near zero, it might be a bridge too far for some assets (see “Lost In Translation“).

In any case, on the rebalancing point, Nomura’s Charlie McElligott noted Thursday that the expected flows (into fixed income and out of equities) are indeed “evidencing themselves in the market, effectively VWAP buying TY vs VWAP selling ES over the course of the day the past two sessions, as evidenced by our futures bid-ask ‘imbalances’ monitor across all lot sizes.”

“Particularly looking at ES (S&P E-Mini) imbalance, we see Tuesday and Wednesday (Light Blue 3/23, Pink 3/24) being two of the four most ‘sold’ of the entire past month window.”

It’ll be somewhat difficult to get a “clean” read on things until early next month, once all of this shakes out and March NFP gets digested.

Finally, you’d be remiss not to keep an eye on the dollar. Talk of 2% on 10s and a trek back towards positive territory for reals will be catnip for any dollar bulls who insist the reopening/economic divergence narrative should trump the long run, fundamental bearish case (e.g., the increasingly explicit character of the deficit monetization effort in the US) in the near-term.

“The DXY is currently flirting with its own break above the 200dma,” TD’s Mazen Issa wrote Thursday.

“Since 2000, it’s worth noting that in past episodes where this has happened, the USD has extended higher for an average of six months thereafter,” Issa went on to write. “The average gain is about 6% too.”


3 thoughts on “The ‘Proper Place’

  1. Lurking in the background, we find this related activity:

    U.S. President Joe Biden next week will travel to Pittsburgh to unveil a $3 trillion package to rebuild America’s infrastructure — which seems like a long-shot, especially if Biden is a lame duck … (same status trump would have had).

    ==> That debt related measure, is sorta connected to prior attempts to talk about the concept of growth and thus how to pay for it and what that means to yields and GDP. I originally hoped to find some relationship with infrastructure and treasury yields at FRED, but didn’t really find a good fit:

    https://fred.stlouisfed.org/graph/?g=CkDP

    ==> “Trump has periodically called for more spending on infrastructure, including during his 2016 presidential campaign. In March, as the pandemic tightened its grip on the U.S., he urged as much as $2 trillion in new investment in U.S. roads, bridges and tunnels.

    That echoed his push two years ago for Congress to dedicate $1.5 trillion toward new infrastructure investment. But hopes for federal legislation ended in May 2019 after Democrats said Trump walked out of a meeting on a $2 trillion plan and vowed not to work with them unless they stopped investigating him and his administration.”

    ==> From Brookings report 2017:

    “The New Deal represented a signature point in time for federal investment in America’s built environment. It helped pave hundreds of thousands of roads, construct hundreds of runway miles at emerging airports, and harness the abundant water resources of the Tennessee Valley. An equivalent federal effort today would require spending an additional $400 billion per year on infrastructure, approaching current annual spending on national defense.”

  2. As much as people — and the Washington press, which is always eager to instigate a fight between Dems and the GOP — want Biden to move on gun control in the wake of two more terrible shootings, the smarter political play is infrastructure — and not the shovel-ready kind (the term should be banned from the WH). We have an ancient failing rail tunnel here in the Northeast that is a disaster (in terms of the efficient flow of commerece in the country’s most densely populate region) waiting to happen, and we sure could use the Gateway project under New York harbor that Chris Christie put the kibosh on. Airport upgrades. Rural broadband. Water infrastructure. Solar retrofits — hell, a whole retthink of the grid — there’s no shortage of projects that we need to get moving on. Especially if, as Biden himself said in yesteray’s presser, we are determined not to let China leapfrog as us the world’s dominant superpower. Actual movement on meaningful infrastructure projects will build bipartisan support for the Biden agenda, creating more space (and support) for the Biden team to address difficult wedge issues like gun control.

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