Bond differentials don’t matter, then they do
November 29, 2024
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–Wednesday featured thin conditions. PCE prices exactly as expected with yoy 2.3% and Core 2.8%. Yields ended lower on the day, with tens down 5.8 bps to 4.246%. Ten year inflation-indexed note to treasury marked at a new recent low of 228 bps (exactly at yoy PCE). Treasury to tip spread this year has ranged from a high high of 243 in April to a low of 203 in early Sept, just prior to the FOMC. Fairly well anchored. High this month is 240.
–A few near SOFR one-year calendars made new lows, for example SFRH5/H6 now -47 (9577.5, +3/ 9624.5 +7). Every three-month spread from Dec’24 forward is inverted until U7/Z7 which is zero (9637/9637). Greens to blues slightly inverted, wouldn’t be surprised to see those pop back to positive, but a lot will depend on the Fed’s posture.
–Tokyo’s Core prices released today were higher than expected at 2.2% vs 2.1 expected. $/yen has fallen to 150 this morning from 151.50 yesterday. High on Nov 15 was 156.70. BOJ meeting is 19-Dec, with odds of a hike about 60% according to Reuters. I’ve attached a chart of 20y JGB to US. The spread is 261 bps and falling, with US 4.47% and JGB 1.86%. In the August yen-carry debacle, a fear was that rising JGB yields would siphon Japanese money back into the domestic market. US FOMC on Dec 18 is around 50/50 for a cut. Fed and BOJ swing by 50 bps?
–I’ve also attached an interesting chart of the French 10y vs that of Greece. Spread now zero. Do bond yields matter in terms of forcing fiscal discipline…or throwing it out the fenêtre? When Greece was considered a basket case, France was borrowing at zero (or negative). Now the tables have turned.
–Markets should be quiet today.
