Interest Rate Market Update, April 4 2019

 

Contact me at Bondworldtrader@gmail.com

Markets: April 4, 2019

  • UST 10s 101-01 (2.506%) off the 100-27 (2.526%) close.  We traded 102-14+ at the high on 3/27, a 2.34%, but it will take weak data to get us back there. To get through 2.34%, one of the most important market levels over the last 7 years, it will take a lot of weak data.  It will take a strengthening of the theme of global then US economic slowing that has taken us from the 3.23% low this cycle to 2.35% last Wednesday.
  • Strong Chinese manufacturing data over the weekend drove us through 2.44%, and then a not weak Jan/Feb Retail Sales Monday got us to 2.50%. Then we got strong Eurozone Services PMI.
  • Over the last week or so a nascent theme may be developing; weak global manufacturing data due to the tariff threat, but continuing strength in services worldwide. That also took some wind out of the market.
  • It looked like it might crack 2.54%, but very weak German manufacturing data helped the Bund this morning.

 

German Industrial Orders, Month Over Month Change

  • Down 4.2% is a big drop.
  • They specifically mention exports and capex as the reason.
  • That leads directly back to tariff fears and the uncertainty it’s created

.GerManuf March 2019

 

Last 12 closing Prices on the UST 10-year

  • From the launch from 2.63% on March 19.
  • To the bounce off of 2.34% on March 27.
  • To return to near the 2.54% level on 4/1.

LastCloses

 

Two-day movement of the UST 10-year note

  • We opened down hard yesterday morning due to stronger services data from the EU (LHS of chart).
  • We opened up this morning (RHS) on very weak German Industrial Orders, down 4.2% m-o-m.
  • 100-24 is 2.54%, and we have not hit that since we came through on March 21.

 

UST10year chart

Source: The Wall Street Journal

 

Economic Data This Week

Tomorrow: 8:30 Payrolls (180k consensus).

 

Eurozone PMIs

  • Stronger than expected EU services data sent bonds down yesterday.
  • Weak German Industrial Orders stabilized it and probably spared us an attack upon 2.54%

Bottom Line:  Expect a break of 2.54% to 2.63% if payrolls are strong without down revisions from previous months.  Anything over 180k we think will do it.  The $73B April refunding of 3-year, 10-year, and 30-year bonds coming next week, so it only needs a little nudge to roll downhill through 2.54% to the next level, 2.59%, and then a powerful level at 2.63%.

If we get a weak surprise of under 80k, we will retake 2.44% and wait for more data for an attack upon the big one- 2.34%.

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Interest Rate Market Update, April 4 2019

 

Contact me at Bondworldtrader@gmail.com

Markets: April 4, 2019

  • UST 10s 101-01 (2.506%) off the 100-27 (2.526%) close.  We traded 102-14+ at the high on 3/27, a 2.34%, but it will take weak data to get us back there. To get through 2.34%, one of the most important market levels over the last 7 years, it will take a lot of weak data.  It will take a strengthening of the theme of global then US economic slowing that has taken us from the 3.23% low this cycle to 2.35% last Wednesday.
  • Strong Chinese manufacturing data over the weekend drove us through 2.44%, and then a not weak Jan/Feb Retail Sales Monday got us to 2.50%. Then we got strong Eurozone Services PMI.
  • Over the last week or so a nascent theme may be developing; weak global manufacturing data due to the tariff threat, but continuing strength in services worldwide. That also took some wind out of the market.
  • It looked like it might crack 2.54%, but very weak German manufacturing data helped the Bund this morning.

 

German Industrial Orders, Month Over Month Change

  • Down 4.2% is a big drop.
  • They specifically mention exports and capex as the reason.
  • That leads directly back to tariff fears and the uncertainty it’s created

.GerManuf March 2019

 

Last 12 closing Prices on the UST 10-year

  • From the launch from 2.63% on March 19.
  • To the bounce off of 2.34% on March 27.
  • To return to near the 2.54% level on 4/1.

LastCloses

 

Two-day movement of the UST 10-year note

  • We opened down hard yesterday morning due to stronger services data from the EU (LHS of chart).
  • We opened up this morning (RHS) on very weak German Industrial Orders, down 4.2% m-o-m.
  • 100-24 is 2.54%, and we have not hit that since we came through on March 21.

 

UST10year chart

Source: The Wall Street Journal

 

Economic Data This Week

Tomorrow: 8:30 Payrolls (180k consensus).

 

Eurozone PMIs

  • Stronger than expected EU services data sent bonds down yesterday.
  • Weak German Industrial Orders stabilized it and probably spared us an attack upon 2.54%

Bottom Line:  Expect a break of 2.54% to 2.63% if payrolls are strong without down revisions from previous months.  Anything over 180k we think will do it.  The $73B April refunding of 3-year, 10-year, and 30-year bonds coming next week, so it only needs a little nudge to roll downhill through 2.54% to the next level, 2.59%, and then a powerful level at 2.63%.

If we get a weak surprise of under 80k, we will retake 2.44% and wait for more data for an attack upon the big one- 2.34%.

Interest Rate Market Update, April 4 2019

 

Contact me at Bondworldtrader@gmail.com

Markets: April 4, 2019

  • UST 10s 101-01 (2.506%) off the 100-27 (2.526%) close.  We traded 102-14+ at the high on 3/27, a 2.34%, but it will take weak data to get us back there. To get through 2.34%, one of the most important market levels over the last 7 years, it will take a lot of weak data.  It will take a strengthening of the theme of global then US economic slowing that has taken us from the 3.23% low this cycle to 2.35% last Wednesday.
  • Strong Chinese manufacturing data over the weekend drove us through 2.44%, and then a not weak Jan/Feb Retail Sales Monday got us to 2.50%. Then we got strong Eurozone Services PMI.
  • Over the last week or so a nascent theme may be developing; weak global manufacturing data due to the tariff threat, but continuing strength in services worldwide. That also took some wind out of the market.
  • It looked like it might crack 2.54%, but very weak German manufacturing data helped the Bund this morning.

 

German Industrial Orders, Month Over Month Change

  • Down 4.2% is a big drop.
  • They specifically mention exports and capex as the reason.
  • That leads directly back to tariff fears and the uncertainty it’s created

.GerManuf March 2019

 

Last 12 closing Prices on the UST 10-year

  • From the launch from 2.63% on March 19.
  • To the bounce off of 2.34% on March 27.
  • To return to near the 2.54% level on 4/1.

LastCloses

 

Two-day movement of the UST 10-year note

  • We opened down hard yesterday morning due to stronger services data from the EU (LHS of chart).
  • We opened up this morning (RHS) on very weak German Industrial Orders, down 4.2% m-o-m.
  • 100-24 is 2.54%, and we have not hit that since we came through on March 21.

 

UST10year chart

Source: The Wall Street Journal

 

Economic Data This Week

Tomorrow: 8:30 Payrolls (180k consensus).

 

Eurozone PMIs

  • Stronger than expected EU services data sent bonds down yesterday.
  • Weak German Industrial Orders stabilized it and probably spared us an attack upon 2.54%

Bottom Line:  Expect a break of 2.54% to 2.63% if payrolls are strong without down revisions from previous months.  Anything over 180k we think will do it.  The $73B April refunding of 3-year, 10-year, and 30-year bonds coming next week, so it only needs a little nudge to roll downhill through 2.54% to the next level, 2.59%, and then a powerful level at 2.63%.

If we get a weak surprise of under 80k, we will retake 2.44% and wait for more data for an attack upon the big one- 2.34%.

Market Update April 3, 2019

 Markets April 3, 2019

UST 10s 100-30 (2.517%) off the 101-10+ (2.47%) close.  We traded 102-14+ at the high on 3/27, a  2.34%, but that massive level is now a bridge too far.

·        Strong Chinese manufacturing data over the weekend drove us down through 2.44%, and then a not weak Jan/Feb Retail Sales Monday got us to 2.50%.

·        Then, last night, stronger than expected Chinese and especially EU services data (see below) drove us from 2.47% to 2.51%.

·        That broke the Bund over zero for the first time since March 21 after trading -0.085%.  that puts additional weight on USTs.

·        ADP came in light at 129k (consensus 178k), but the up-tick got sold by the futures geeks.

·        The market will either retake 2.44% or it will break 2.54% when the supply from the $73B April refunding of 3-year, 10-year, and 30-year securities gets here Tue-Thu next week and threaten a break to 2.63%.  The data will determine which way we go, including Payrolls Friday.

·        The challenge is, most of what has moved the market lately has happened overnight or the weekend.  If you want to have any idea of what drives market prices at 8:00 AM NYT, you better be keeping some strange hours.

·        The narrative of a weakening global economy, specifically the Chinese and the EU, leading to a weakening US economy takes another hit.  It’s not unusual that the data turns.  No one yet knows if that is what is happening- that we are preparing for a soft landing.  What we do know is that Chinese and EU services data is stronger than expected even while manufacturing data softened at the end of last year.

·        The constant message from the WH that a trade deal is near not only jacks the stocks but provides another negative theme for the bond market.

·        Williams and Mester, both hawks, will be on the tape today: Williams at 1 and Mester at 4.

·        The Chinese have initiated a multitude of stimulatory actions; maybe they can avoid a significant slowdown.  That would complicate the Fed ease scenario now in the markets and priced into the UST curve.

·        The market needs more fuel- weaker data, to go higher,  Right now it needs to retake 2.44%.  it’s harder now that bills through the 7-year are negative carry.

·        The April mini refunding is announced tomorrow.  The specter of supply is upon us.

Most Recent Closes of the UST 10-year

04032019 Recent Closes

·        Conclusion: It’s stalled, stuck, out of fuel. The narrative of slower growth gets damaged by Chinese manufacturing strength, offsetting services strength, and continued talk by the Fed that one more time is likely, vol will be with us for a while.

Two-day movement of the UST 10-year note

·        We opened down hard this morning due to stronger services data from the EU.

·        The ISM PMI at 10 was weaker than expected, holding it in so far (see far RHS).

·        The global weakness narrative took a hit, but it’s not over.  The market rarely lets loose of a powerful theme so easily.

·        It could stay here- 2.63-2.35, for weeks or months.

UST 10-year April 3, 2019

Economic Data This Week

Today 815: ADP 129k (178k consensus).

Friday 8:30 Payrolls (est. consensus 180k).

Eurozone PMIs

 Stronger than expected EU services data sent bonds down.

BN 04/03 08:00 *EURO-AREA MARCH SERVICES PMI 53.3; PRELIM 52.7
BN 04/03 08:00 *EURO-AREA MARCH COMPOSITE PMI 51.6; PRELIM 51.3
BN 04/03 07:55 *GERMANY MARCH COMPOSITE PMI 51.4; PRELIM 51.5
BN 04/03 07:55 *GERMANY MARCH SERVICES PMI 55.4; PRELIM 54.9
BN 04/03 07:50 *FRANCE MARCH COMPOSITE PMI 48.9; PRELIM 48.7
BN 04/03 07:50 *FRANCE MARCH SERVICES PMI 49.1; PRELIM 48.7

        US Morning Data

04032019 econ data

ISM data, most important, was weaker, holding the market in so far.

Tomorrow

The key is to hole 2.54% off of tonights 2.51%  close.  We doubt if we can retake 2.44%, the next level up, unless payrolls, estimated to be 180k Friday 830, is less than 100k.  That supports the economic slowing narrative that is the reason we have gone from 3.23% to 2.34% (Wed. March 27) on the UST 10-year, though we have given back 17 bps in the last week.

                                                                                                

Interest Rate Movement Market Update for April 1, 2019

 

I meant to make this blog weekly but want to update you with causes of inter-day events when they are important.

  • The UST 10 year fell 27/32’s today. The yield increased from Friday’s 2.407% close to 2.503% at the close today.
  • The immediate cause was an event over the weekend- strong Chinese manufacturing data.
  • In yesterday’s blog report, we traced the movement of the UST 10-year from the 3.23% high yield in October and December of last year to the 2.35% low yield reached last Thursday.
  • That reduction in rates began when weak Chinese economic data, combined with reductions in estimates of Europe’s growth (GDP from 1.9% to 1.1% for 2019), started a powerful narrative in the US. That narrative was that slowing Chinese and EU growth, combined with increased financial tightness due to the Fed’s 2.25% increase in the funds rate since 12/15, would lead to a slowdown in US growth.  It could also lead to a recession, or worse, create the conditions for deflation.

UST10year_Week of Mar 25 2019

Today’s Events

The strong Chinese manufacturing data caused world fixed income markets to open down in price and up in yield this morning (see the middle of Chart 2).

Chart 2: UST 10-year Note Price on Friday (LHS of the chart) and Monday, April 1 (RHS of the chart)

April 1 UST 10-year

  • After trading 102-04 Friday (2.375%) we closed 101-29 (2.407%).
  • This (Monday) morning, news of strong Chinese PMI sent UST 10s to 2.44% (see the price at 101-17 at 8am on RHS of the chart), a support level. Strong data weakens the narrative that the global economy is slowing and that the US will slow as well.  Anything that does that causes rates to rise.
  • Then at 8:30 Retail Sales came out.

 

The Feb Retail Sales numbers were weak.  Looked like the market was going up.

Retail Sales

  • Then guys looked at the revisions.  Revisions to January were strongly positive and roughly offsetting, with the headline rising to +0.7% from +0.2%, ex-autos to +1.4% from +0.9%, and control to +1.7% from +1.1%.

 

  • So, given the January numbers were revised to show the economy may not be losing steam, at 830 the market continued down to 2.50% on UST 10s. It appears the holiday and Q1 seasonal adjustments on Retail Sales and GDP are fubar.

 

The Yield Curve

The 2-year/5-year spread, which was -8 a week ago, steepened in to -1.  That means 5s, which were 8 bps lower in yield than 2s, are now only 1 less.  That means the delayed easing expected by the market of the Fed seems much less likely now.  The Chinese data did great damage to the narrative of a slowing global economy.  That may be temporary if US data, particularly Payrolls on Friday, is weak.

 

What Next?

  • We need to hold 2.50% on 10s and see if the market can recapture 2.44%.
  • Behind 2.50%, the next support is 2.54%, behind that 2.63%, which took 17 attempts to break through.
  • The key for the bulls is to capture and close inside of 2.34%, one of the most important levels in the market and one it will take some very weak data to overcome.

US Treasury Bond Market: Week of March 25, 2019

This blog on interest rates will be published every Sunday night.

What is it intended to do? I began giving daily updates to traders at Wall Street firms in the 1980s.  Later, I wrote market updates to US government agencies such as Ginnie Mae and the Federal Housing Finance Agency regarding critical market issues that affected them or those whom they regulated.

It will tell you how and why interest rates moved the previous week, and what to look for in the coming week that may have an impact on rates.

Who is it written for?  It is written for anyone that would benefit- professionally or financially, from a description of the movement of interest rates over time, and, an ability to describe the reasons for those movements to superiors and clients.  It is also written for traders and investors who want clear descriptions from a market professional about the important themes driving rates in the future.

Structure: I strongly believe that understanding rate movements is often a study of the history of how we got to where we are.  Once a month I will review rate history going back to some important event and give you a context in which to understand how we got there and there to where we are now.  Some may not think this relevant, but if you see with your own eyes the effect of, for example, deflation fears on rates, you will know what is possible the next time it becomes a market theme.

Chart 1: Major Movement and Levels of the UST 10-year Note from the July 2016 High

UST 10-year 1.37 to 3.23

  • The all-time low yield on the UST 10-year was 1.37% in July of 2016.  The last Sunday of the month I will sue to explore history: At that time, I will explain the events that got us to 1.37%.
  • After the Trump election, the market remembered that he had promised large tax cuts.  Since expenditures were not going to be cut as well, the US deficit would have to increase.  It is estimated $1 Trillion in additional securities needed to be issued.  More bonds, higher rates needed to sell them, period.
  • Rates rose from 1.76% to 2.62% as the greater expected supply due to the tax cut caused rates to rise.  That’s why we study history; that’s what threatened deficits can do.
  • Then, when it looked like Trump couldn’t get the tax deal done in late 2017, rates fell from 2.63% to 2.01% (follow on Chart 1) on the likelihood there would be $1 Trillion less to sell.
  •  Uh-oh, suddenly it was announced that the 2017 tax cut was getting done, and rates rose to 3.23% (note the “double bottom” on the RHS of Chart 1), the 3.23% high (rate).

Why Have Rates Fallen Since December?  Fear that the US economy is slowing.

  • Economic data from China and especially Europe has begun to slow.
  • This recovery is, by historical standards, very old.  The record longest expansion (a period without a recession) is 120 months (June 1991-June 2001).  This recovery started in June 2009.  The data go all the way back to the 1800s.  At some point, there is going to be a recession.
  • There is not enough space to discuss all the recent US economic data, but the broadest measure of economic strength- Gross National Product, is definitely slowing.

Chart 2: US GDP by Quarter

  • US GDP appears to be slowing.  Many estimates of Q1 2019 GDP are under 2%.
  • Some believe 2018 GDP was jacked by the 2017 tax cuts.  But, the stimulative impact of that tax bill falls in 2019-20.US GDP by Quarter
  • The Fed, which has been raising rates from 0.125% in December 2015 to 2.3875% today, may have helped bring about the slowing of the economy they have sought.  If the economy is slowing on its own, there is no reason for the Fed to continue to raise rates.  The markets guessed in December that the Fed was done raising rates, and rates on UST securities have fallen since then.

Last Week’s Movement of the UST 10-year Note

The UST 10-year, along with the federal funds rate, are the two most interest rates in the US and arguably the world.  Many world securities- emerging market, mortgage, and corporate securities trade at an interest rate spread to the US 10-year.  So, let’s start there.

We will constantly be talking about “levels”.  Levels are a place where the market tends to stop.  In technical analysis, there are points are called “support and resistance”.  We will use these terms interchangeably with one exception; levels are places where the market tends to stay for sometimes weeks, sometimes months.

 

Chart 3: Movement of the UST 10-year Note Last Week

From here it gets a bit more technical.  Stay with me week-to-week and in a few weeks, you will understand this well.  Securities like the German Bund, and events like US Treasury auctions (or refunding’s; selling debt to finance the deficit) you will learn to watch as you learn their impact on US rates.

UST10year_Week of Mar 25 2019

Source: CNBC

The UST market advanced last week as rates continue to fall.  The critical level is 2.34%.

2.34% is the gateway to 2%.  It is going to be difficult to crack without more of the fuel that has been driving rates lower since 3.23%- economic data leading markets to anticipate a slowing of the US economy.

  • On Wednesday UST 10s 102-06+ (2.375%%), off the 101-24 (2.425%) close Tuesday.  2.375% is a minor level, and it is banging on that now.   If you follow us, you know that the big one to break is 2.34%
  • We bounced off of 2.35% Wednesday morning, part of an attack on 2.34% that will eventually succeed.
  • That’s because the markets driving narrative is mutating, intensifying.
  • Back in Q4 2018, the market just wanted the Fed to stop tightening into what appeared to be a weakening economy.  The market just wanted a “pause”.
  •  Now, the market has gone Full-Monty: It now wants pre-emptive rate reductions to prevent deflation.  That implies a series of rate cuts.
  • Though US data in no way leads one to believe that a recession is near, the market knows it’s about time.  The party has lasted close to the 120-month record and may exceed it, but the real challenge is if it can be extended and how bad it will be if they cannot.
  • We backed off 2.35% and by Friday closed at 2.40%.  But expect further attacks on 2.34%

The Yield Curve

As for the curve, the increase of the 2/5 spread from -8 to -5 bps, and the steepening of 2/10 from 14 to 17.5 bps implies the markets see the greater nearness of a rate cut.  If the Feds going to ease soon, this must steepen (the spread between UST 2-year and UST 10 -year will widen out past 20, not flatten.

The Bund

The 10-year German Bund has now gone negative.  Euro markets got another further delay in tightening from Draghi last week.

Important Data Next Week (Week of April 1)

Remember, we are looking for weaker data that will push us through 2.34%.  It is important that this happens next week, as in the following week the US Treasury will sell over $70B of 3-year, 10-year, and 30-year securities in the April mini refunding.

The three most important economic indicators determining rates are Gross National Product (GDP), The Consumer Price Index (CPI), and Payrolls/Unemployment Rate.  In terms of determining what the Fed will do, these are the “Big Three”.  Though other data matters as well- particularly if it is significantly weaker or stronger than forecast, those three will matter most.  Particular attention should be paid at the day and time those data are released.

US payroll growth (Non-Farm Payrolls) is the number of jobs the economy creates each month.  It has averaged greater than 200k per month over the last year- very strong growth.   Any slowdown under 100k-130k will be considered signs of a weakening US economy, and rates would fall.

The key next week will be getting any of the data below to come in weaker than expected, especially if it is significantly weaker, indicating a deceleration of the economy and confirmation of the market narrative that the US economy will slow.  That is what has caused rates to fall the past three months (3.23% to 2.40% last Friday).

Next Week’s Important Economic Releases

April 1 Week Calendar

Source: Investing.com

Levels to Watch

UST 10-years need to take 2.34%.  When they do not, we must not break 2.44% support.

If we break 2.34% this week, then expect 2.28%, then 2.17%.

 

Please feel free to comment (this is written for you) so I can make this blog better.  See you next Sunday!

Bio of the author:IMG_0133

John Jackson is the author of this blog.  John started trading bonds in 1979 for GE Credit Corp and has worked at a number of Wall Street firms as an US Treasury arbitrage trader.  His specialty is yield curve arbitrage and his long experience with the Fed has made him an insightful analyst of their thinking.

Jackson is a graduate of Yale University with a degree in economics, and, the Columbia University Graduate School of Business Administration, with an MBA in Finance and Money and Financial Markets.

John is the senior trader for a mortgage company in Virginia.