New high yields
October 20, 2022
–Yields continue to surge. 2y +11 to 4.546%, 5y +12.7 to 4.343%, 10y +12.5 to 4.121% and 30y +10 to 4.119%. The first three are at highs since 2007, the bond since 2011. High prints in 2006 (pre-GFC): 2y 5.15, 5y 5.09, 10y 5.14, 30y 5.19…so all a bit over 5% as the Fed had been hiking from mid-2004 to mid-2006, 25 bps at every meeting, to a high of 5.25%. Note that the 30y yield exceeded 2’s and 5’s by the end of that cycle.
–$/yen near 150 this morning. A tweet by Valerie Tytel shows Japan 10y swap > 30 bps higher than the quarter percent cap set on 10y JGB’s. Can JGB hold the cap?
https://twitter.com/ValerieTytel/status/1582973176492933125/photo/1
–Bullard said the market is priced for the November meeting, doesn’t want to judge for December, but in 2023 thinks the Fed can get back to running more “ordinary” monetary policy based on data. He said that it doesn’t appear that there is a lot of financial stress presently. [give it a month]. FFX2 at 9620 is actually a couple bps cheap to a 75 bp hike. FFF3 at 9548 is 4.52%, not quite pricing an additional 75 for Dec…but close.
–Yesterday there were many press references to the anniversary of the 1987 crash (October 19). One of the causes was the increase bond yields. At the start of 1987, the ten year yield was at a low for the year of 7.00%. On October 14, it hit a high of 10.2%. This year the low 10y yield was also set in January (1.51% on December 31, 2021). As noted it was 4.12% at futures settle. In magnitude, it’s only 261 bps this year as compared to 320 in 1987. But the percentage move and associated negative cash flows are much more pernicious this year.
–Liz Ann Sonders posted a clip from Louis Rukeyser’s Wall St Week, which featured Marty Zweig’s prescient call for the 1987 crash just days before the event. Link below. In a pre-guest summary, LK’s description of reasons for stock market weakness could have been from today:
First let’s round up the usual suspects. Interest rates are moving up, a development that hit stocks with a double whammy: higher rates cut into corporate profits and deter expansion. In addition, they increase the attractiveness of investments that compete with stocks [bonds]. With treasury bonds tumbling another two points this week to their lowest levels in two years, the yields on all fixed income investments are on the rise. Second, jitters over new incidents in the Persian Gulf gave already nervous traders a fresh excuse to keep on selling. Third the political situation was scarcely encouraging. Not only the concern over leadership in both parties, but a new tax increase package…that would further penalize investment and savings. Fourth, Wall St itself seemed in disarray from scary layoffs at two major firms to growing evidence that the mindless computer driven program trading of the big institutions can turn worry into panic and prudent selling into wholesale desertion.
At least the Persian Gulf is now stable…
https://twitter.com/LizAnnSonders/status/1582712005588553728
