Head of Fixed Income Strategy
Summary: The Pfizer-Seagen deal is likely to have caused the sudden rise of long-term U.S. Treasury yields above a critical resistance level. Thirty-year yields now look headed to 4% as they have broken bullish out of the symmetrical triangle-like pattern it has formed in the past couple of months. Today's 20-year U.S. Treasury auction, tomorrow's initial jobless claims, and the Philadelphia Fed business outlook might further contribute to their rise. Nevertheless, in the long term, the upside for long-term yields is limited, as they are poised to retrace while the economy decelerates.
While 2, 5, and 10-year U.S. Treasury yields are range bound, the 30-year Treasury yield has broken bullish out of the symmetrical triangle-like pattern it has formed over the past few months. They now look headed for resistance at around 4%. If breaking above the March peak at about 4.025%, there is potential for an October peak at about 4.40%. A move below 3.67% will demolish and reverse this bullish scenario (courtesy of Kim Cramer Larsson, Technical Analyst).
It’s important to note that long-term yields began to rise on Monday when rumors of a Pfizer-Seagen deal started to spread. By raising $31 billion, the Pfizer-Seagen deal became the fourth-largest deal in U.S. capital markets. For investors, it meant that bonds of a high-quality, non-cyclical company with a rating of A1/A+ would provide an alternative to U.S. Treasuries. That is particularly true on the long part of the yield curve, where yields remain compressed amid recessionary fears. The 40-year tranche was the highlight of the deal, pricing at 160bps over treasuries, down from 180bps IPT due to high demand. Consequently, investors sold Treasuries to make space in their portfolios to participate in the deal.
As Kim noted above, 30-year yields seem now headed towards 4%. Today's 20-year U.S. Treasury auction might help yields to rise further towards this level, as it remains one the least liked maturities across the yield curve. Tomorrow’s initial jobless claims and the Philadelphia Fed business outlook might also affect long-term yields.
Yet, the upside for long-term yields remains limited, as they are poised to retrace as the economy decelerates, consumer sentiment is weak, and credit tightening leads the economy into a recession.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
