Posted on by The Daily Shot Editor: Lev Borodovsky

What drove the decline in bond yields?

The Daily Shot: 09-Jul-21
• Rates
• Credit
• Equities
• Energy
• Emerging Markets
• China
• The Eurozone
• The United States
• Global Developments
• Food for Thought

 

Rates

1. The 10-year Treasury yield is nearing support at the 200-day moving average, with technicals suggesting that the bond rally is becoming stretched.
 

 
What drove this rapid drop in yields? Many analysts have pointed to supply/demand technical factors as the key reason.
 
Source: Deutsche Bank Research  
 
The US Treasury has been issuing less debt as it taps its cash holdings (see chart). The Fed has been mopping up all the new issuance, tightening the supply and sending yields lower.
 
Source: Reuters   Read full article  

——————–

 
2. The first Fed rate hike is now fully priced in for February of 2023 (vs. November of 2022 a few days ago).
 

 
3. Long-term inflation expectations have been moderating.
 
• 30yr breakeven rate:
 

 
• 5yr inflation swap, 5 years forward:
 

 
• Inflation options markets:
 
Source: @benbreitholtz  
 
The inflation swap curve has become more inverted (inflation expected to moderate over the long run).
 
Source: @TheTerminal, Bloomberg Finance L.P.  

——————–

 
4. The spread between Treasuries and Bunds has been tightening.
 

Back to Index

 

Credit

1. An average US high-yield bond now yields 3.7%.
 

 
2. US CLO activity has been exceptionally robust, easily absorbing all the new supply of leveraged loans.
 
Source: @lcdnews  
 
Below are a couple of forecasts for the full year.
 
Source: Bloomberg   Read full article  
 
Source: Deutsche Bank Research  

——————–

 
3. The pandemic caused companies to tap their revolving facilities (as revenues dried up), resulting in more funded exposure than banks (and other credit providers) expected. Lenders now just want term loans.
 
Source: @LPCLoans  

Back to Index

 

Equities

1. The S&P 500 held resistance at the upper Bollinger band.
 

 
2. The Russell 2000 is now underperforming the Nasdaq 100 year-to-date.
 

 
The iShares Russell 2000 ETF tested support on Thursday.
 
Source: @hmeisler  

——————–

 
3. Meme stocks are in bear-market territory.
 
Source: Bloomberg   Read full article  
 

——————–

 
4. Why is the correlation between growth and value hitting extreme lows?
 

 
The trend is driven by the growth factor’s increasing correlation with Treasuries (TLT = iShares 20+ Year Treasury ETF).
 

 
In particular, it’s the growth mega-caps that have become highly correlated with bonds (QQQ = Nasdaq 100).
 


 
But many value stocks are not correlated to bonds. In fact, banks are inversely correlated with Treasuries (positively correlated with Treasury yields). As a result, these sectors have become less correlated with growth stocks.
 
• Financials:
 

 
• Industrials:
 

Back to Index

 

Energy

1. US crude oil inventories continue to shrink, supporting oil prices.
 

 
• Days of supply:
 

 
• Inventories at Cushing, OK (NYMEX WTI settlement hub):
 
Source: @HFI_Research  
 
Gasoline inventories also declined.
 

——————–

 
2. US gasoline demand scored a record high as Americans hit the road (going into the July 4th weekend).
 

 
Source: @Lynnmdoan   Read full article  

——————–

 
3. US crude oil production, which has been capped at 11 million barrels per day, is breaking higher.
 

 
4. Many shale firms hedged their output and are now selling crude oil well below spot prices (hedges offsetting price gains).
 
Source: @adam_tooze, @FT   Read full article  
 
5. Coal prices have been surging.
 
Source: @WSJ   Read full article  

Back to Index

 

Emerging Markets

1. Rising inflation has caused many EM central banks to raise rates this year (3 charts).
 
Source: Alpine Macro  
 
Source: IIF  
 
Source: IIF  

——————–

 
2. Mexican core CPI continues to climb. More rate hikes are on the way.
 

 
3. Brazil’s inflation is also rising.
 

 
4. Chile’s CPI held steady last month.
 

 
5. EM productivity is set to grow sharply over the next couple of decades.
 
Source: @Callum_Thomas  

Back to Index

 

China

1. The headline CPI ticked lower even as core inflation held steady.
 

 
Falling pork prices pushed the headline CPI down.
 

——————–

 
2. The PPI also ticked lower.
 

 
3. With consumer inflation under control and business activity moderating, the PBoC is considering some targeted easing. The central bank may cut reserve requirements for some banks.
 
Source: Reuters   Read full article  
 
Source: CNBC   Read full article  
 
The renminbi’s strength relative to a basket of currencies could also be making the PBoC uneasy.
 

——————–

 
4. Will Beijing impose a property tax?
 
Source: Gavekal Research  

Back to Index

 

The Eurozone

1. The ECB tweaked its policy approach after an extensive review. Here is a summary.
 
Source: @WSJ   Read full article   Further reading  
 
2. Forecasters don’t see inflationary pressures ahead.
 
Source: @JanVonGerich   Read full article  
 
Wage growth has not been a concern.
 
Source: Gavekal Research  

——————–

 
3. Based on market pricing, negative rates will be around for years.
 
Source: Nordea Markets  
 
4. Stocks took a hit on Thursday, but the market has stabilized today.
 

 
Source: @jsblokland  

——————–

 
5. German exports have fully recovered.
 

 
The trade surplus continues to trend lower.
 

Back to Index

 

The United States

1. The May increase in consumer credit was the highest on record as Americans tapped their credit cards. Auto debt has been growing as well.
 

 
Source: @WSJ   Read full article  
 
• The overall consumer credit remains well below the pre-COVID trend.
 

 
Nonrevolving credit (auto loans and student debt) is back to its pre-pandemic trend.
 

 
But credit card debt declined massively last year. The May increase isn’t too dramatic when we look at the total dollar amounts.
 

 
• Growth in student debt remains well below pre-pandemic levels.
 

——————–

 
2. Initial jobless claims have leveled off since May.
 
Source: @GregDaco  
 
Continuing claims keep trending lower.
 
Source: @WSJ   Read full article  
 
Unemployment insurance benefits per capita remain elevated, which should support spending.
 
Source: Deutsche Bank Research  

——————–

 
3. Used car prices remain near all-time highs, but the wholesale index appears to have peaked.
 

Back to Index

 

Global Developments

1. Let’s take a look at bond yields and public debt/interest payments going back to 1800.
 
Source: @jessefelder, @johnauthers   Read full article  
 
Source: Deutsche Bank Research  

——————–

 
2. How will different currencies respond to a steepening US yield curve?
 
Source: Nordea Markets  
 
3. Here are the components of some of the largest debt markets.
 
Source: Gavekal Research  
 
4. Money velocity is rebounding (slower money supply growth, stronger GDP).
 
Source: Oxford Economics  
 
5. M&A activity has been surging.
 
Source: @axios   Read full article  

——————–

Back to Index

 

Food for Thought

1. COVID risk by county:
 
Source: The Act Now Coalition  
 
2. Mask usage in the US:
 
Source: Gallup   Read full article  
 
3. US troops in Afghanistan:
 
Source: @chartrdaily  
 
4. Top sources of disinformation on Facebook:
 
Source: Statista  
 
5. Peacekeeping operations (2 charts):
 
Source: Statista  
Source: Statista  

——————–

 
6. Freedom of speech vs. support for free speech:
 
Source: The Economist   Read full article  
 
7. Melting glaciers (2 chats):
 
Source: @niko_tinius   Read full article  
 
Source: Visual Capitalist   Read full article  
 
8. Data on US active shooter incidents:
 
Source: FBI  
 
9. City street network orientation:
 
Source: @emollick   Read full article  

——————–

 
Have a great weekend!

Back to Index