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Weekly Commentary: Regime Change

Weekly Commentary: Regime Change

Ten-year Treasury yields closed out a tumultuous week at 1.41% bps, pulling back after Thursday’s spike to a one-year high 1.61%. Ten-year Treasury yields are now up 49 bps from the start of the year and almost 100 bps (1 percentage point) off August 2020 lows. More dramatic, five-year yields jumped 16 bps this week to 0.73%.

Surging yields are a global phenomenon. Ten-year yields were up 12 bps in Canada (to 1.35%), 30 bps in Australia (1.90%), 28 bps in New Zealand (1.89%), five bps in Germany (-0.26%), and five bps in Japan (0.16%) – with Japanese JGB yields hitting a five-year-high.

“Periphery” bond markets were under intense pressure, Europe’s and EM. Greek yields surged 22 bps to 1.11%, while Italian yields rose 14 bps to 0.76%. EM dollar bonds were bloodied. Yields were up 31 bps in Turkey (5.90%), 28 bps in the Philippines (5.90%), 25 bps in Peru (2.39%), 23 bps in Indonesia (2.57%), 16 bps in Qatar (2.14), 16 bps in Ukraine (6.95%), and 16 bps in Mexico (2.92%). Local currency bonds were walloped. Yields were up 125 bps in Lebanon, 31 bps in Brazil, 29 bps in Colombia, 27 bps in Romania, 19 bps in Poland, and 17 bps in Hungary.

Global bond markets have an inflation problem. The international central bank community has an inflation problem. Perhaps Treasuries and the Fed face the biggest challenge in managing around mounting inflationary risks.

The U.S., after all, is running unprecedented peacetime deficits, with a new $1.9 TN stimulus package scooting through Congress. This legislation will be followed by what is sure to be a major infrastructure program. There is literally colossal deficits and Treasury issuance as far as the eye can see.

February 23 – Bloomberg (Gerson Freitas Jr.): “Commodities rose to their highest in almost eight years amid booming investor appetite for everything from oil to corn…
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These “Gradual” Rate Hikes Start to Add Up: US Treasury Yields up to Three Years Hit 10-Year Highs

These “Gradual” Rate Hikes Start to Add Up: US Treasury Yields up to Three Years Hit 10-Year Highs

An entire generation working on Wall Street has never seen Treasury yields this high.

The one-month treasury yield rose to 2.0% yesterday at the close and is at about the same level today, the highest since June 10, 2008. It is starting to price in a rate-hike at the Fed’s September 25-26 meeting. This rate hike, the Fed’s third this year, would bring its target to a range between 2.0% and 2.25%.

The three-month yield, currently at 2.14%, has reached the highest level since February 26, 2008. Back then, as the Financial Crisis was taking its toll, yields were going through enormous volatility, as the chart below shows. During that volatile period in mid-2008, the three-month yield spiked for a day to 2.07% on June 16, but never got back to the 2.14% in February that year:

It hasn’t been exactly a whirlwind rate-hike cycle with one-percentage-point rate hikes per meeting, à la Paul Volcker in the early 1980s, but in their “gradual” – as the Fed never tires to point out – easy-to-digest, no-surprises manner, the rate hikes are starting to add up. There is an entire generation working in the finance industry and on Wall Street who has never seen Treasury yields this high. They’re in for a learning experience.

The one-year yield rose to 2.49% at the close yesterday, and remains at about the same level today, beating the 2.48% on June 25, 2008:

The two-year yield closed at 2.66% yesterday and trades at the same level today, the highest since July 25, 2008 (when it closed at 2.70%):

The three-year yield, at 2.73% yesterday, and edging down just a tad at the moment, is at the highest level since August 14, 2008:

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“This Won’t End Well” – Mortgage Rates Spike To 4-Year Highs

Growth? Inflation? Be careful what you wish for, as the surge in Treasury yields has sent mortgage interest rates to their highest in four years, flashing a big red warning light for affordability and home sales in 2018…

The U.S. weekly average 30-year fixed mortgage rate rocketed up 10 basis points to 4.32 percent this week. Following a turbulent Monday, financial markets settled down with the 10-year Treasury yield resuming its upward march. Mortgage rates have followed. The 30-year fixed mortgage rate is up 33 basis points since the start of the year.

Will higher rates break housing market momentum?

As the following chart shows, that surge in rates will have a direct impact on home sales (or prices will be forced to adjust lower) as affordability collapses…

Dollar-Denominated Corporate Time Bomb Set to Blow

Dollar-Denominated Corporate Time Bomb Set to Blow

Emerging economies around the world are already feeling the first pangs of withdrawal as fast yield-chasing investors send their funds back to the U.S. in anticipation of higher Treasury yields and a further appreciating dollar.

In Mexico, the central bank has just published its balance of payments data for the third quarter, 2015. The results do not make for pretty reading.

Early Signs of a Stampede

Net portfolio investment – the total amount of foreign money spent on Mexican financial assets – clocked in at a paltry €933 million, down from $4.47 billion during the same quarter last year. That’s a 79% drop. It was also Mexico’s fifth successive quarterly decline and the lowest level recorded since 2002. Although the rout was across the board, it was particularly pronounced in the private sector which suffered a €241 million net outflow of funds.

Interestingly, while portfolio investment stagnated, foreign direct investment (FDI) flourished, growing by 57.6% in the first nine months of 2015. In other words, those who are investing for the long haul continue plowing funds into Mexico. Which is wonderful news — in the long term! The problem is that investors who are after the quickest of monetary fixes are frantically moving their money out. And that is bad news in the short term! Crises are made of this phenomenon.

And right now, with monetary pressures building around the globe, it’s the short term that counts.

Since the U.S. Federal Reserve alighted on its madcap scheme to flood the global economy with dirt cheap, easy-come-easy-go dollars, high-yield seeking “investments” have poured into emerging markets. Much of the money ended up in Mexico, one of comparatively few Latin American economies to have completely liberalized its financial sector.

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