INSUBCONTINENT EXCLUSIVE:
Investors are about to absorb $131 billion of Treasury note auctions at the lowest yields in months, after they piled into US debt following
a dovish Federal Reserve decision and fresh signs that global growth is weakening.
The week kicks off with a closely watched segment of the
US yield curve foreshadowing a recession: The gap between 3-month and 10-year rates is now negative
In the leadup to the economic downturn that began late in 2007, this part of the curve initially flipped to inverted in early 2006
The curve’s latest collapse came amid reports showing weakness in France and Germany, while an index of American manufacturing slowed.
The
days ahead bring readings on the US housing market and consumer confidence, which may help investors gauge the Fed’s next step after
policy makers unexpectedly scaled back projected rate hikes this year to zero
There will also be an array of Fed speakers to weigh in on the developments, not to mention a planned Brexit vote in the UK
Parliament.
“The Fed’s actions and commentary have given investors the impression that they know something that the rest of the market
doesn’t know about the future of the economy,” said Kevin Giddis, head of fixed income at Raymond James in Memphis, Tennessee
“This is a classic momentum trade now that favors riskoff that is leading us toward the conversation about a recession.”
He’s focusing
on the data this week that are leading indicators, like housing starts, to see if the economy is actually faltering.
Bond investors seem to
be leaning in that direction, even as the labor market is the tightest in decades
The benchmark 10-year note yields 2.44 per cent, close to its lowest since January 2018
Giddis sees it ending the year at 2.25 per cent.
Money-market traders are also ramping up bets that a rate cut is coming, even as policy
makers still have their next move penciled in as a hike in 2020
Fed funds futures show traders see about an 80% chance of a quarter-point easing this year, up from about 30 per cent early last week.
While
the San Francisco Fed calls the 3-month-to-10-year spread the most useful for forecasting recessions, some investors aren’t convinced by
this latest market signal.
Michael Kushma, chief investment officer for global fixed income at Morgan Stanley Investment Management, says
this part of the curve “is distorted” by global forces fueling demand in the long end
And increased bill supply is elevating short-end rates, he said.
The demand for new Treasuries with 2-, 5- and 7-year maturities may get a
lift from tumbling yields worldwide
The sales will also offer investors a chance to pass judgment on the Fed’s decision to end its balance sheet roll-off sooner than some
expected.
“The auctions will clarify investor commitment to Treasuries at these new lower levels,” said Jim Vogel, a strategist at FTN
“The auctions will also clarify where people want to put their money on the curve
You can’t avoid the taper when you have to commit billions of dollars to Treasuries.”
