After typically writing on each Treasury note auction, I’ve now just focused on longer term ones as the short end is of course tied to the Fed. Today’s 7 yr note auction was great and follows too solid auctions in 2s and 5s over the prior two days. The yield of 3.517% was under the when issued of almost 3.54%. The bid to cover of 2.69 was well above the 12 month average of 2.48. Finally, direct and indirect bidders took down 94% of this auction, the most on record dating back to 2009 with this maturity.
Bottom line, this week brought an impressive level of demand for US treasuries at auction and notwithstanding debt ceiling nonsense rhetoric. If I had a dollar for every person that has asked me about it and my ‘it’s a non event as it always is’ response. That said, it’s clear that the exploding US debts and deficits is gaining more and more conversation and what that means in enticing buyers of our paper (will get more difficult) in addition to the impact on the US dollar it will bring (will continue to decline after a solid 2022).
I want to make clear that the global economic picture this year is clear as mud. The US economy is clearly downshifting (no, Q4 GDP was not strong when clearing thru the noise and 2022 real GDP was up only 1% from an easy comparison of 2021 and because of the Q4 inventory build which was likely mostly unwanted, Q1 2023 is VERY likely going to show a contraction of note) but as you’ve heard me now say for the past month, the China reopening is going to reinvigorate not just China, but so many other countries in the Asian region and in Europe too. Also, if commodities further rally from here, which I expect them to, the commodity producing South American countries will be helped as well.
This then will keep global inflation elevated, after the current downturn runs its course, and interest rates will remain elevated for a while.
Tying this into the stock market, the problem for the US remains the earnings recession that is now upon us and still high earnings multiples (driven by the growth stuff still as value is much cheaper) along with the backdrop of massive QT. Markets outside the US don’t have that valuation extremity and have the potential of seeing earnings improvement, although interest rate risks remain overseas too.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.