As the dust settles at the end of this week, we’ve learned a couple of things about the tone and temper of the bond market. For one, US Treasuries are firmly in the “this won’t last” camp with respect to inflation. Despite an eye-opening spike to a 28 year high for core consumer price inflation, the yield on the 10yr T-Note fell below 1.50% to the lowest levels since early March. For now, the 3.8% reading for core CPI is widely viewed by bond market professionals as well as Fed officials as a “transitory” knock-on effect of the US economy’s reopening from the COVID pandemic. By the end-of-summer, baseline effects will have faded away, supply lines will be repaired, access to low-cost sourcing of goods and services will come back online, the sharp snapback in demand will slow down, and inflation measures will revert to trend. That’s the way the script reads anyway, and so far, the Treasury market buys that storyline.
Another thing we discovered is that despite massive deficit finance needs the US Treasury can still put away bond auctions like a champ. There was a healthy appetite for $58 billion 3yr, $38 billion 10yr, and $24 billion 30yrs Treasuries that came to market. Even adjusted for the cost of currency hedges, US sovereign debt is the best relative value for global money, and Treasuries remain the safe-haven choice of nervous investors wishing to avoid the risk of irrational gamified stocks and/or crypto “currencies” (cyber-criminals notwithstanding). Time will tell if the demand for US debt will keep pace with ever-increasing supply. Or, more precisely, the necessary yield level that allows demand to keep pace.
From the Fed’s perspective, all is going according to plan. In fact, the recent fedspeak is perfectly harmonious as policymakers sing from the same hymnal. After suggesting last fall that the Fed wasn’t even thinking about thinking about raising rates, they’ve now moved to talking about talking about removing stimulus. Moreover, some like Dallas Fed President Kaplan make the point that the asset purchases will need to be adjusted in order to remove distortion in financial markets regardless of the inflation debate. Amen to that. Backstopping every type of security regardless of credit, or accepting as collateral any old piece of paper is the definition of moral hazard. The recent announcement that the Fed was unwinding their Corporate Credit Facility is welcome news to those who believe the crisis is over and markets need to trade without intervention.
Other notable data for the week included the Job Openings and Labor Turnover (JOLTS) report which showed that the number of available jobs climbed to 9.3 million during the last month, the highest data back to 2000, from an upwardly revised 8.3 million the prior month. The so-called “quits rate,” the number of people who voluntarily left their jobs rose to a series high of 2.7%, suggesting that workers are growing more confident in their ability to find other employment. All good news for a labor market with employment still far below pre-pandemic levels. Finally, we hear this morning from the University of Michigan that US consumer sentiment rose by more than expected, and inflation expectations of those surveyed fell… providing a bit more comfort to the “transitory” crowd.
US 10yr T-Note Yield: June ’20 – Today
Next week we’ll be treated to fresh retail sales data as well as producer prices, industrial production, and an assortment of housing market metrics. Expect all to continue grinding higher with another eyebrow-raising inflation print when PPI comes out Tuesday the 15th. The Fed’s Open Market Committee (FOMC) meets next week as well.