The 5 yr note auction was on the softer side. The yield of 1.988% was above the when issued of around 1.975%. The bid to cover of 2.38 is slightly below the one year average of 2.42 and the lowest since July. Direct and indirect bidders took about 68% of the auction, leaving dealers with the balance and that was right in line with the previous 12 month average.
Bottom line, with the auction weakness (with respect to the yield) on top of an already weak Treasury market today means we have yields across the curve at the low of the day. The generic 5 yr yield is up 6 bps on the day after rising by 7 yesterday. Of note, the 5 year inflation breakeven is at 2% for the first time since August 2014:
The 10 yr yield is now at 2.52-2.53%, a 4 week high. At Europe’s close, sovereign yields closed at the highs of their day. I’ll say this, if the stock market ends up being correct in its optimism for Trump growth, bond yields are going much higher from here.
Speaking of Trumponomics and the stock market rally, I’m going to talk about bonds some more because the biggest central bank driven bubble ever (how else can one describe negative yielding securities where the only way to make money is to sell it to some other fool at an even further negative yield) continues to leak air and we got some interesting comments today from ECB Executive Board member Sabine Lautenschlaeger. Granted she is German but therein is the point I keep emphasizing, that the battle between the Germans and the ECB has us in the last inning of ECB QE. She said today in a speech that “All preconditions for a stable rise in inflation exist. I am thus optimistic that we can soon turn to the question of an exit.”
She is a known hawk so we are not surprised by the comments but still pay attention to this story this year. In response, the German 10 yr bund yield is up by 5 bps to .46%, the highest since January 2016. The French 10 yr yield is also rising to a one year high. I’ve said many times that European sovereign bonds are an accident waiting to happen. I will now up the rhetoric and call it a train wreck waiting to happen when I see yields so unbelievably low with now inflation rising and QE tapering beginning in April. Stay short and I still like the euro.
Overnight the Japanese 40 yr JGB yield touched 1% for the first time since February 2016 but backed off and closed at .97%, up 2 bps on the day. This yield was 7 bps at the blow off rally peak in July post Brexit. The spread between the 10 yr yield pegged at zero and the 40 yr is at the widest since March 2016.
More signs of a bottoming in global trade were evident in the December Japanese trade data as exports rose 5.4% y/o/y vs the estimate of up 1.1%. While this was certainly helped by the weaker yen off the November lows, merchandise volume exports still rose 8.4% with particular strength to the rest of Asia and record exports to China. The Nikkei was up 1.4% but got help from the weaker yen yesterday.
Also in Asia as we continue to watch the fallout from China’s economic slowdown was South Korea’s Q4 GDP figure which rose 2.3% y/o/y, a hair better than the 2.2% estimate but a slowdown from 2.6% seen in Q3 and the slowest pace of gain since Q2 2015. This came as the President was impeached and pressure grows on the Chaebol’s to restructure. The Kospi was flat overnight.
Two important European business confidence indices moderated in January. The German IFO fell to 109.8 from 111. Expectations were for a further rise to 111.3. That is a 4 month low but the components were mixed as the fall was all in the Expectations component which fell 2.3 pts while Current Conditions were up slightly. The IFO said “The German economy made a less confident start to the year.” French business confidence fell 1 pt to 104 vs the estimate of no change and off the best level since 2011. French business confidence peaked in 2007 at 115. I’m not going to make much of the modest m/o/m falls but one has to wonder what European exporters, particularly those in Germany, are thinking with Trump’s tweet driven trade policy.
The CBI industrial order index in the UK improved by 5 pts to +5, the highest since February 2015. The weaker pound has certainly emboldened exporters but CBI also saw “strong growth in domestic orders.” This came with higher inflation pressures as “unit costs rose at the their highest pace in over 5 years.” Also, “concerns persist over access to skilled labor…with almost a quarter of respondents, the highest since July 1989.” The US is running into the same skilled labor scarcity. The pound is quietly at a 5 week high as we now have at least some path to Brexit and the UK economy hangs in much better than feared. The real test will be how the consumer handles the inevitable jump in inflation.
Off the extreme market sentiment read of last week, it is a bit less extreme this week as Bulls fell 2.4 pts to 58.2 off the most since July 2014. Bears rose a touch to 17.5 from 17.3. This puts the spread at a still wide 40.7 vs 43.3 last week and vs 40.3 in the week prior. The very big differential that began in mid December coincided with a market that has just churned since. After yesterday’s close the S&P 500 is up .4% off the 2016 peak close of 2271 on December 13th.
Mortgage applications to buy a home rose 6% w/o/w after falling by 5.2% in the week prior. They are flat y/o/y. We see December new home sales tomorrow and watch to see how higher rates impacted sales, if at all. Refi applications were flat w/o/w but are down 31% y/o/y. The 30 yr mortgage rate was up by 8 bps to a 3 week high but still off 10 bps from the 4.45% multi year high we saw in late December. I cannot emphasize enough to those who haven’t refinanced in a while, WTF are you waiting for because these yields are going higher.