Parallels
October 1, 2023 – Weekly Comment
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Just a few charts and thoughts this week.
Treasury yields made new highs, led by longer maturities. On Thursday, the 20yr poked just above 5% but came back down to end the week at 4.90%. Similarly, the 30yr popped above 4.80% but ended near 4.70%, up 19 bps on the week. Using the w/I from last week, the 2yr note ended down 2 bps to 5.048%.
What was interesting about Thursday is that even though bonds were posting new high yields (high since 2011), SPX remained above Wednesday’s low, so there was a small divergence. On the week SPX was only down 0.7% to 4288. The fact that Congress was able to kick the can a short distance down the road with temporary legislation to keep the government running may be viewed favorably, but overall price action in equities remains weak, with a poor close on Friday.
Below is a chart comparing general patterns from 2007 with now. In March of 2007 Bear Stearns revealed problems with their mortgage funds; they were essentially marked down to zero. In March of this year SVB and a couple of other regional banks were marked down to zero. Stocks sold off in both events but soon recovered early March highs.
In July of 2007, SPX suffered a sharp drop. CNN Money attributed the move to tough conditions in credit markets. This year SPX put in a recent top at the end of July. It has been a much more gradual decline since then (as compared to 2007) but underlying conditions are similarly suggestive of a much more difficult environment for companies to roll debt. Spreads have not really blown up, but I would argue that the surge in long bond implied volatility to the highest levels since March indicates that broader problems in credit markets are around the corner. (I marked USZ vol just above 15% on Friday; USZ3 114^ settled 5’20). NOTE: The MOVE index does not give the same warning, because it is comprised of volatility levels across the treasury curve. In fact the MOVE has posted successively lower highs in late May, July, August and Sept. (chart at very bottom).
The first chart doesn’t show it, but the ultimate top in 2007 came on October 11. Surprisingly, after the sharp drop in July, the index came back to make a new high…and then began a painful slide. You’ll notice that in 2007 the swoon in mid-August did not quite take out the March low. That low was taken out in January. This year the March low was 3809. With SPX ending the week at 4288, we’ll need a decline of another 11% to reach the March low.
It felt like the big move this week was the curve. However, the chart of 2/30 below doesn’t really signal a momentous change in trend, even though the spread gained over 20 bps. Rallies in the curve are typically associated with Fed easing or the strong expectation of a looser central bank.
This time, the Fed is trying to project a harder line in the fight against a possible resurgence in inflation expectations. It’s not typically the case that bond yields rise aggressively in the context of monetary restraint, but that’s where we are now, and most bets are centered around 1) how long before something breaks 2) how has the perception of the Fed put changed? Will the Fed ease rapidly or grudgingly?
One last chart is a long term $/yen. The 150 level was tested this week. The 10y JGB hasn’t been this high in yield since 2013 (76 bps). The 20y JGB ended at 1.48% and the 30y at 1.73%, also both new highs. Higher costs for capital globally and a stronger USD don’t bode well for long-dated US assets.
Chart below is MOVE vs US vol
| 9/22/2023 | 9/29/2023 | chg | ||
| UST 2Y | 506.7 | 504.8 | -1.9 | |
| UST 5Y | 456.7 | 460.5 | 3.8 | |
| UST 10Y | 443.6 | 457.1 | 13.5 | |
| UST 30Y | 451.8 | 470.8 | 19.0 | |
| GERM 2Y | 325.9 | 320.3 | -5.6 | |
| GERM 10Y | 273.9 | 283.9 | 10.0 | |
| JPN 20Y | 144.9 | 147.7 | 2.8 | |
| CHINA 10Y | 269.2 | 268.1 | -1.1 | |
| SOFR Z3/Z4 | -82.5 | -86.0 | -3.5 | |
| SOFR Z4/Z5 | -68.0 | -63.5 | 4.5 | |
| SOFR Z5/Z6 | -8.5 | -1.0 | 7.5 | |
| EUR | 106.45 | 105.73 | -0.72 | |
| CRUDE (CLX3) | 90.03 | 90.79 | 0.76 | |
| SPX | 4320.06 | 4288.05 | -32.01 | -0.7% |
| VIX | 17.22 | 17.52 | 0.30 | |
