More debt, higher yields, slower growth (and robots)
Oct 28, 2019
–Yields rose Friday on light volume with steady to falling implieds. Tens ended +3.7 bps at 1.801% and are up another 3 this morning as TYZ trades 129-09, approaching the low from mid-September. Worth a note as well, China’s ten year sovereign prints 3.30% this morning, the highest yield since June and up 1/4% since the low in mid-Sept.
–This week brings the FOMC announcement on Wednesday, widely expected to result in a cut of 25 bps to 1.50-1.75% range. FFX9 is currently priced right in the middle, settling Friday at 9838.5 or 1.615%. The focus will be on forward guidance and a possible long term repo solution. On Friday the employment report is released with NFP expected 90k. While both Atlanta Fed’s GDP Now and NY Fed’s Nowcast are in agreement on Q3 GDP at 1.8% and 1.9% respectively, the NY Fed is currently pegging Q4 at just 0.9%. There’s more talk recently of lower credit quality, which will certainly be put to the test in a flat growth environment. According to the St Louis Fed website, the BAML CCC spread is now at 10.6%, approaching the high spike made at the end of last year when stocks were tanking, this in spite of the fact that equities are currently near all time highs.
–On Friday the US released the budget deficit, coming in at an impressive $984 billion for the fiscal year, up 26% yoy for the third consecutive increase. When Trump proclaimed himself the ‘king of debt’ he wasn’t kidding.
–EDH20/EDH21 spread closed -18.5, up 2 bps on the day and right at its recent high. The lowest one-year calendar is still EDZ19/EDZ20, but the forward spreads become consistently more positive, indicating that forward expectations of easing are lessening. At the same time, the ten year note to tip spread has edged up to a new recent high of 1.655% having been sub-1.5% a month ago. Inflation expectations could be starting to creep up.
