February 26, 2021

Markets Today: A big bond sell-off

Despite the increasing dovishness of central bankers the markets have been selling government bonds like they are going out of fashion.

Today’s podcast

Overview: Don’t call me up

  • Bond selloff continues, big yield moves in the belly suggests a fundamental re-pricing
  • US 10yr yield sits at 1.51% (intra-day high of 1.6085%), while 5yr moved 21.5bps to 0.82%
  • Stocks react, heavy falls in S&P500 -2.2%; NASDAQ -3.4%; Russell 2000 -2.3%
  • EM FX under pressure from rate moves (TRY, BRL, MXN and ZAR move by 1.6-2.9%)
  • RBA failed to quench the bond sell-off yesterday; unlikely to follow RBNZ with housing
  • Australian bond selloff extremely aggressive, 10yr future moved by 20bps overnight!
  • Coming up: AU Credit, RBNZ’s Orr, BoE’s Haldane, US PCE & Chicago PMI

“I’m over you and I don’t need your lies no more; ‘Cause the truth is without you, boy, I’m stronger; And I know, you said that I changed with my cold heart; But it was your game that left scars; Ooh, I’m over you”, Mabel 2018

The bond market sold off sharply overnight with no real news to drive developments apart from a surprisingly sharp fall in Jobless Claims (730k v 825k expected and down from 841k). The US 10-year Treasury yield is up another 13.7bps to 1.51% (intraday high 1.6085%) and its highest level since last March and some 44bps higher this month alone. Importantly the sell-off is now being felt in real yields (10yr real yield -0.63%) with the implied inflation breakevens broadly steady at 2.16%. The sell-off in the belly was greater with the 5-year yield up some 21.5bps to 0.82% and aligns with markets bringing forward pricing for when the Fed will start to lift its cash rate to early 2023. Australia continues to see an even more aggressive selloff with the 10yr bond future moving by 20bps overnight to 98.08 and implying a US-10 year yield spread of some 43.5bps – well above where the spread was trading when Debelle first floated QE back in September 2020.

Fed officials aren’t stepping in the way of yield moves and are taking them as a signal of growing optimism in the recovery. The Fed’s Bostic noted “I am not worried [about yield moves]”; Fed’s Bullard “So far so good on the yields” ; Fed’s George “Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations” . Bullard was particularly hawkish, noting that he sees unemployment falling to 4.5% by the end of 2021 and aligns of Treasury Secretary Yellen’s observation that if stimulus is passed, full employment could be reached by the end of 2022. Key question markets are grappling with are does this mean we will see an early tapering of QE, and rate rises when they come will they be particularly steep – former NY Fed President Dudley penned a piece a few days ago saying the “tightening process will probably have to happen quite briskly” suggesting 200bps a year! Where you are getting some more pushback is in Europe with ECB Chief Economist Lane stating that their bond buying could be adjusted to prevent unwanted tightening in in financial conditions.

Equities are starting to quiver on the outlook for higher rates with losses led by the tech sector. The S&P500 so far is down 2.2% with all sectors in the red (the fall though means the S&P500 just 2% off its all time highs). The tech heavy NASDAQ is down a more sharp 3.4%. Analyst commentary suggests the days of piling into stocks regardless of valuations may be over with higher yields. Reddit users though clearly aren’t listening with GameStop up 68% along with AMC Entertainment 9.8% ($600 stimulus checks?; perhaps a mirror for what is to come with the next $1,400 checks. On that a CNBC poll found 40-50% of people said they didn’t need the checks; of course that means 50% of people do).

The outlook for growth remains very positive. The US CDC reported 20.6m Americans are now fully vaccinated (some 6.8% of the population) and that 45.2m have received one dose (some 13.6% of the population). Jobless Claims overnight also came in better than expected with headline claims at 730k v. 825k expected. Winter storms though may have driven some of the unexpected decline so it is hard to be definitive. Jobless Claims should drop sharply once the economy re-opens further on the back of the vaccine rollout.

FX moves have been large in EM, but modest in G10 FX. The USD is mixed in the G10 basket with six of the G10 currencies up, and four down.  The EUR punched up through 1.22, though has pared gains to be up 0.3% to 1.2183. The AUD reached 0.80 overnight, the first time since 2018, although it has since fallen back in line with the decline in equity markets, down -0.5% to 0.7901.  The NZD reached an intraday high above 0.7450 yesterday, shortly after the Finance Minister announced the RBNZ’s Remit would be changed, but it too has fallen back the past few hours and now sits around 0.7391.

EM FX has been a bloodbath with sharp falls being seen in TRY, BRL, MXN and ZAR of around 1.6-2.9% as investors worry about higher USD rates for vulnerable EMs. The Brazilian central bank was said to be intervening in markets.

Yields moves in Australia remains outsized with the 10yr bond future -20bps to 98.09. Such volatility in Australian rates is no doubt putting off investors and also exacerbating moves. The RBA’s upsized 3yr YCC program failed to stem the rise in longer-term rates with Aussie 10yr bond yields up some 12bps yesterday. The market now prices the first 25bp rate hike in Australia by the end of 2022, despite the RBA having recently stated it didn’t expect to see the conditions for a rate rise until 2024 “at the earliest”. With the US heading to full employment by the end of 2022 and Australia’s economic performance outpacing that of most countries, it’s no surprise to see markets pricing in the chance of rate hikes in 2022 and 2023. Bloomberg’s MIRP function now has the cash rate at 0.81% by February 2024.

Meanwhile across the ditch the NZ government has announced a change in the RBNZ monetary policy remit as previously flagged. From March, the Monetary Policy Committee will need to assess the impact of its decisions on the government’s objective of having sustainable house prices, in addition to its other pre-existing considerations (such as avoiding unnecessary instability in output, interest rates and the exchange rate). Separately, the Finance Minister said the RBNZ will need to have regard to house price sustainability in its financial stability decisions as well. My colleagues at BNZ suggest the remit change is unlikely to fundamentally alter the outlook for monetary policy.  But the market, which pushed both NZ rates and the NZD higher after the announcement, seems to have interpreted the change as implying the RBNZ will, at the margin, run policy a little tighter than it would have otherwise. We do not see any parallel changes to the RBA’s remit.

Coming up today

Quiet domestically with just credit figures on the radar. Across the ditch RBNZ Governor Orr is speaking. Elsewhere it is largely quiet with a few BoE speakers, while the US as Core PCE inflation. Details below:

  • AU: Credit – January: Credit growth is starting to recover on the back of housing market activity and a very tentative pick-up in business credit. Consensus sees growth at 0.3% m/m and 1.8% y/y. Also released with the credit statistics are household deposit holdings and here it will be interesting to see whether households are starting to drawdown on the $125bn in cash savings that have been accumulated since the start of the pandemic.
  • NZ: RBNZ’s Orr, Consumer Confidence, Trade: RBNZ Governor Orr speaks at a Canterbury Chamber event, though it is unclear how much more he will add given the recent policy meeting, MPS and speeches. As for data, neither is particularly market moving. The trade balance is expected to dip into negative in January to -$0.6bn from 0.0bn
  • JN: Tokyo CPI, IP, Retail Sales: A trifecta of key data with mixed outcomes expected by markets. Core Tokyo CPI is expected to remain subdued at 0.2% y/y, Industrial Production should rebound by 3.8% mm, while retail sales is forecast to go backwards -1.2% m/m.
  • UK: BoE’s Haldane & Ramsden: Chief economist Haldane is speaking on inflation which is topic de jour for markets given inflation fears.
  • US: PCE Deflator, Chicago PMI, Uni Michigan: Core PCE inflation is expected to remain subdued at 0.1% m/m and 1.4% y/y. Along with the PCE Deflator is the Personal Spending/Income data where the US personal savings rate currently sits at an extremely high 13.7% in December and is forecast to increase further, boosted by the US government’s recent fiscal package (including a batch of $600 cheques sent to households). The extremely high stock of US household savings is one reason some economists expect a wave of pent-up spending once the economy reopens. As for the other data pieces, the Chicago PMI is expected to remain elevated at 61.0, while the Uni Michigan Consumer Confidence is a final measure with focus on the inflation components given the 1yr expectation at 3.3% is the highest since July 2014.


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