Rates Move Higher and Steeper, US Treasury Rates Bizarre

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Rates moved both higher and steeper again last week. Curve steepening has been pronounced with the 2-10 at 1.30% and the
3m-10 at 1.40%. While bonds are oversold in the short term, the long-term trend line should eventually take yields up to the 2.0%-2.5% area.
• We saw some very bizarre US Treasury rate action last week. Tuesday saw 2 year and 30 year fractionally higher while 5 year and 10year were lower. The shortest (1bps) and longest (3bps) maturities did not move too much while 5 year were up 16bps and 10 year & 20 year were up only 10bps. A clear kink in the curve.
• Momentum and technology stocks are bearing the weight of the rise in yields. MTUM, a proxy for the broad momentum factor across the US equity market, was down over 5% across 5 days which is only the second time it has reached that degree of a selloff since March.
• Central bankers on both sides of the Atlantic did their best to assure markets last week. Powell reiterated the Fed’s commit- ment to explicit forward guidance to the Senate Banking Committee and offered reassuring views on inflation and the rise
in yields. Lagarde and Schnabel also made clear the ECB will ensure there will be no unwarranted tightening of financing condi- tions.
• In the past, dovish braying and big QE helped stocks AND bonds but recently markets have been behaving as if there has been a shift in market psychology translat- ing to a change in bond yield to stock price correlation.
• Inflation remained a key focus of market participants last week. BCA noted West Texas Intermediate prices rising 70% since October alongside correlation data between gasoline prices and headline inflation.
• In a separate research note, BCA ad-dressed several myths surrounding 1970’s style inflation relative to today.
• Strategas reiterated confidence in the overall market due to continued internal market dynamics such as reopening pairs, BB/BBB spreads, CD vs CS, high beta vs low beta, advance/decline ratios, and cycli-cal sector performance.
• The $1.9t stimulus package passed the HOR and is heading to the Senate. Strategas estimates approximately $700b of consumer related stimulus will hit within the next six months.

Economic Release Highlights

• January Personal Income and Outlays report showed MoM personal income (10% vs 9.4%) and personal consumption (2.4% vs 2.2%) both higher than expected while core PCE was in generally in line with expectations at MoM (0.3% vs 0.1%) and YoY (1.5% vs 1.4%).
• December’s Case-Shiller Home Price Index rose more than expected for a second consecutive month at MoM (1.3%a vs 1.0%e) and YoY (10.1%a vs 9.6%e).
• New (923k vs 855k) and Pending
(-2.8%a vs 0%e) Home Sales were mixed with new exceeding pending continuing to lag.
• Conference Board Consumer Confi-dence for February came in higher than expected (91.3 vs 90.0) but remained somewhat subdued.
• The final UofM Consumer Sentiment for February remained at the relatively subdued level of 76.8a vs 76.4e.
• January Durable Goods Orders acceler-ated faster than expected (3.4% vs 1.1%), well over December’s 0.5%, providing further evidence of an upward trending manufacturing cycle.

 

 

 

 

 

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