Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Fixed Income Strategy
1. Bond Market Implications: Yield Curve Normalization. The market expects the yield curve to normalize as long-term yields rise, which could impact bond pricing. A steeper yield curve may drive demand towards short- and medium-term bonds as investors seek higher relative returns with lower duration risk.
2. FX Implications: Strong Dollar. U.S. Treasuries are becoming more attractive to European investors, particularly due to a favorable yield differential when hedged for EUR. This could lead to increased foreign participation in Treasury auctions, potentially supporting the U.S. dollar as European demand rises. Conversely, JPY-hedged U.S. Treasuries remain less appealing compared to Japanese government bonds, which may temper demand from Japan.
3. Equity Market Implications: Equity Volatility. Increasing volatility in bond markets, particularly if PCE data comes in hotter than expected, could spill over into equities. Higher bond yields and rate uncertainty may weigh on equity valuations, especially in growth sectors sensitive to interest rate changes, like technology.
4. Commodities Implications: rise in gold. Strong demand for mid- and long-term U.S. Treasuries, coupled with concerns about inflation data, could signal mixed investor sentiment toward inflation-sensitive assets such as commodities. A hotter PCE report may push investors to seek inflation hedges like gold and commodities, increasing demand in those markets.
The upcoming U.S. Treasury auctions are well-positioned for strong demand due to several key factors:
These factors suggest strong support for this week's Treasury auctions, especially as foreign investors may increase their participation.
The upcoming 5- and 7-year U.S. Treasury auctions will serve as important indicators of market appetite for mid- to longer-term debt, especially in the context of rising economic uncertainty. Since last week's FOMC meeting, the 10-year Treasury yield has increased from around 3.6% to 3.75%, driven by growing belief in the possibility of a soft landing. However, that optimism has been shaken by yesterday's sharp drop in consumer confidence, where the present situation indicator fell by 10 points to 124, the largest decline since August 2021, signaling increasing concerns over labor market conditions.
The auctions take place just ahead of the Personal Consumption Expenditures (PCE) report, the Federal Reserve’s preferred inflation gauge. The market expects core PCE to rise slightly to 2.7% from July’s 2.6%. Strong demand in these Treasury auctions could indicate growing concern about the economic outlook and confidence that inflation remains under control. However, if the auctions rally before a hotter-than-expected PCE report, rates volatility may further increase, potentially leading to higher long-term yields and further normalization of the yield curve.
Yesterday’s $69 billion auction of 2-year U.S. Treasury notes priced on the screws with a High Yield of 3.520%, the lowest for this maturity since August 2022. The front end of the yield curve remains well-supported, as markets anticipate significant rate cuts from the Federal Reserve in the upcoming meetings.
Swap contracts currently reflect expectations for both a 50 and 25 basis point cut by year-end, with a 50% chance of a cut happening in November. Currently, markets are pricing in a total of 78 basis points in rate cuts by the end of the year, while the Federal Reserve’s latest dot plot suggests a more moderate 50 basis point reduction. This divergence highlights the ongoing uncertainty between market expectations and the Fed's projected path, which could increase volatility going forward.
The bid-to-cover (BTC) ratio for the 2-year auction came in at 2.59, down from 2.81 in July but in line with historical averages from 2021 and 2022. As a reference, the BTC ratio for 2-year auctions hit a record high in January 2023 as investor preferred the short part of the yield curve over longer Treasuries carrying higher duration.
23-Sept Eurozone PMI Panic: What’s Next for Investors?
23-Sept Recession Red Flags: Europe’s PMIs and Yield Curve Sound the Alarm
18-Sept 4 Short-Term Bond ETFs to Maximize Returns Over Money Market Funds
18-Sept 4 Short-Term Bond ETFs to Maximize Returns Over Money Market Funds
16-Sept Bank of England Preview: Rates on Hold, but Inflation and QT Shape the Outlook
11-Sept Why U.S. Treasuries Look Expensive Ahead of the Upcoming Rate-Cutting Cycle
10-Sept Election Faceoff: Harris and Trump’s Policy Differences and What They Mean for Your Portfolio
06-Sept ECB Monetary Policy Decision Preview: A Post-Summer Balancing Act
04-Sept Stretched Valuations: Why the Bond Market's Next Move Hinges on Jobs Data
03-Sept The Reality Behind the UK’s Gilt Sales – It's Not About Confidence in the Government
02-Sept Bonding with Buffett: How the Oracle’s Stock Picks Can Boost Your Bond Portfolio
30-Aug Austria’s 2086 Bond Flop: What It Means for Ultra-Long European Debt
29-Aug Capitalizing on Fed Rate Cuts: A Guide to Emerging Market Local Currency Bonds
29-Aug Uncovering Value: The Strength of European Investment-Grade Bonds
28-Aug Insights into this week's US Treasury auctions: 2-, 5-, and 7-year overview.
22-Aug Wage Growth and Economic Resilience Challenge Market Expectations for Aggressive ECB Rate Cuts
20-Aug Understanding U.S. Treasury Auctions: What You Need to Know
19-Aug Insights into this week's US Treasury auctions: 20-year U.S. Treasury bonds and 30-year TIPS.
16-Aug No Signs of Imminent Recession: Why Bond Investors Should Approach Insurance Rate Cuts with Caution
14-Aug Markets Skeptical Despite Positive UK Inflation Report
09-Aug Yield Curve is Disinverting: Lessons from Past Crises
07-Aug Stable Bond Spreads and Robust Issuance Make a 50 bps Rate Cut in September Unlikely
06-Aug Insights into this week's US Treasury refunding: 3-, 10-, and 30-year overview.
05-Aug Why Investors Must Pay Attention: BOJ’s Hawkish Moves Could Roil Global Markets
30-July BOE Preview: Better Safe than Sorry
29-July FOMC Preview: A Data-Dependent and Balanced Approach
24-July Market Impact of Democratic vs. Republican Wins
23-July Insights into this week's US Treasury auctions: 2-, 5-, and 7-year overview.
16-July Insights into this week's US Treasury auctions: 20-year U.S. Treasury bonds and 10-year TIPS.
15-July ECB Preview: Conflicting Narratives – Rate Cuts vs. Data Dependency
15-July Understanding the "Trump Trade"
11- July Bond Update: Faster Disinflation Paves the Way for Imminent Rate Cuts, but Risks of Economic Reacceleration Remain
09-July Insights into This Week's U.S. Treasury Auctions: 3-, 10-, and 30-Year Tenor Overview and Market Dynamics.
08-July Surprise Shift in French Election Fails to Rattle Markets for Good Reasons.
04-July Market Optimism Ahead of French Elections Drives Strong Demand for Long-Term Bonds
01-July UK Election Uncertainty and Yield curve Dynamics: Why Short-Term Bonds Are the Better Bet
28-June Bond Market Update: Market Awaits First Round of French Election Voting.
26-JuneBond Market Update: Canada and Australia Inflation Data Dampen Disinflation Hopes.
30-May ECB preview: One alone is like none at all.
28-May Insights into this week's US Treasury auctions: 2-, 5-, and 7-year tenors overview.
22-May UK April’s Consumer Prices: Markets Abandon Hopes for a Linear Disinflation Path.
17-May Strong trade-weighted EUR gives ECB green light to cut rates, but bond bull rally unlikely
14-May UK labor data and Huw Pill's comments are not enough for a bond bull rally
08-May Bank of England preview: Rate cuts in mind, but patience required.
06-May Insights into this week's US Treasury refunding: 3-, 10-, and 30-year overview
02-May FOMC Meeting Takeaways: Why Inflation Risk Might Come to Bite the Fed
30-Apr FOMC preview: challenging the March dot plot.
29-Apr Bond Markets: the week ahead
25-Apr A tactical guide to the upcoming quarterly refunding announcement for bond and stock markets
22-Apr Analyzing market impacts: insights into the upcoming 5-year and 7-year US Treasury auctions.
18-Apr Italian BTPs are more attractive than German Schatz in today's macroeconomic context
16-Apr QT Tapering Looms Despite Macroeconomic Conditions: Fear of Liquidity Squeeze Drives Policy
08-Apr ECB preview: data-driven until June, Fed-dependent thereafter.
03-Apr Fixed income: Keep calm, seize the moment.
21-Mar FOMC bond takeaway: beware of ultra-long duration.
18-Mar Bank of England Preview: slight dovish shift in the MPC amid disinflationary trends.
18-Mar FOMC Preview: dot plot and quantitative tightening in focus.
12-Mar US Treasury auctions on the back of the US CPI might offer critical insights to investors.
07-Mar The Debt Management Office's Gilts Sales Matter More Than The Spring Budget.
05-Mar "Quantitative Tightening" or "Operation Twist" is coming up. What are the implications for bonds?
01-Mar The bond weekly wrap: slower than expected disinflation creates a floor for bond yields.
29-Feb ECB preview: European sovereign bond yields are likely to remain rangebound until the first rate cut.
27-Feb Defense bonds: risks and opportunities amid an uncertain geopolitical and macroeconomic environment.
23-Feb Two-year US Treasury notes offer an appealing entry point.
21-Feb Four reasons why the ECB keeps calm and cuts later.
14 Feb Higher CPI shows that rates volatility will remain elevated.
12 Feb Ultra-long sovereign issuance draws buy-the-dip demand but stakes are high.
06 Feb Technical Update - US 10-year Treasury yields resuming uptrend? US Treasury and Euro Bund futures testing key supports
05 Feb The upcoming 30-year US Treasury auction might rattle markets
30 Jan BOE preview: BoE hold unlikely to last as inflation plummets
29 Jan FOMC preview: the Fed might be on hold, but easing is inevitable.
26 Jan The ECB holds rates: is the bond rally sustainable?
18 Jan The most infamous bond trade: the Austria century bond.
16 Jan European sovereigns: inflation, stagnation and the bumpy road to rate cuts in 2024.
10 Jan US Treasuries: where do we go from here?
09 Jan Quarterly Outlook: bonds on everybody’s lips.