US bond yields know no limits
Summary: Overnight market action saw some very significant levels breached, particularly in US government bonds, where yields are hitting new highs across the curve. These moves will likely reverberate globally.
The thing about global macro, is it literally comes down to a handful of key days in a year. There are the days that have huge implications from a need-to-react function, say an event like Brexit, the Trump victory or Swiss National Bank's franc de-peg, that can make you a fortune or lose you the ranch.
Then there are the slightly more ‘ninja sessions’, when the markets cross exceptionally significant levels. The overnight session was an example of the latter, and it's worth bearing in mind that folks sometimes miss the ‘ninja session’ and read the initial market reaction or lack thereof as being correct.
US bond yields are breaking out to new cycle highs, as we took out the congestion in the 10-years (3.12%) and even more importantly in the 30-years (3.26%). As we continue the Asia morning we are at 3.18% on US 10-yr treasuries (yes… that would have been considered high in the 30-yr bonds just a few weeks ago) and 3.34% on the 30-yr bonds. The latter breaks a big multi-year resistance line (think US 10-years at that 2.60-70 level and then again at 3.00-10).
This was correlated to a few big things overnight, chiefly the US once again demonstrating that it is on fire versus the rest of the world (this has been a Macro Monday mantra and continues to be the most important theme in global macro).
ISM services came in at 61.6a vs. 58.0e or 58.5p – its all-time highs surpassing the 59.6 peak in 2004. ADP smashed it at +230k a vs. 185k e. Suggesting US 3Q GDP will be stronger than expected.
Meanwhile as we are getting this historical move in yields and economic data, equities were bid, volatility ticked lower (VIX at 11.61, c. -4% for the session -10% last five days), USD went up yet predominantly against the majors and less significantly against EM FX.
A few things seem to be lagging, chiefly gold (at c. $1,200/oz) which should be easily $10-20 dollars lower from here given the higher USD and the higher breaking out in US yields. Japanese government bonds which at c. 13-14bps should be breaking out above 20bps. Even bunds at 47bps should be pushed higher, albeit that has to be measured against the noise in Italy and its budget process. Bottom line… the rest of the world’s global yields cannot exist in a vacuum as the US pushes higher. It looks like things are setting up for further legs in the USD and a potential nipping in the bud of the technical bounce we had seen in EM assets. CNH at 6.9065 feels like it should be much higher… as should some of the other EM currencies. Also downside expression in equities, which can be cheaply expressed through long puts/ put spreads resonate with this writer.
The price action on S&P Futures & Nasdaq-100 in the Asia morning session at -45bps and -55bps is more of a market that is starting to digest the implications of higher US yields. Incidentally guess where S&P500 dividend yields are? That’s right 2.0%, that with 1-yr treasuries at 2.60%, 2-yr at 2.88% and 5-yr at 3.05% (yes 305 bps).
Latest Market Insights
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)