Market Analytics and Technical Considerations
Key Points
On Tuesday, U.S. Treasury yields increased as investors awaited statements from Federal Reserve Chairman Jerome Powell this week and November labor market data that may bolster expectations that the U.S. central bank will slow its rate of interest rate increases.
On Wednesday, Powell will speak at the Brookings Institution about the economy, inflation, and labor. On Friday, the non-farm payrolls report will be released, and Reuters polled economists expect 200,000 new jobs this month. Investors are also awaiting data from the Institute for Supply Management on factory activity, Chicago manufacturing numbers, and the third quarter’s gross domestic product in the United States.
The Fed’s highly constant message that it would continue to raise rates, although in smaller steps, and that once they reach the target rate, they will remain there for some time, has not yet been fully absorbed by the market. We haven’t received any fresh economic information or data that would fundamentally change the direction the market is heading.
At the Fed’s policy meeting on December 13-14, Fed funds futures have priced in a 63.5% chance of a 50-basis-point hike, with the terminal rate peaking at 5.007% in June and falling to 4.644 percent in December 2023. Markets believe the Fed will be able to shift toward a more neutral level of federal funds sooner than is likely the case.
The yield on 10-year Treasury notes increased by 5 basis points to 3.752%, while the yield on two-year Treasury notes increased by 1.5 basis points to 4.486%, which typically moves in line with expectations for interest rates.
The yield curve, which compares the yields on two-year and 10-year notes, remained incredibly inverted at -73.6 bps. The inversion, which happens whenever yields on narrow debt are greater compared to those on longer-dated debt, is a sign of an imminent recession.
The bond market has a yield curve that is pretty much inverted, so investors are betting on a long recession because they know the Fed won’t be there right away to save the market if things slow down.
As they awaited information regarding Amazon.com Inc.’s multi-tranche corporate bond deal, investors sold treasuries .There are notes with maturities of two, three, five, seven, and ten in the deal. U.S. Treasury bonds plus 45 basis points (bps), 55 bps, 85 bps, 100 bps, and 115 bps are the initial price talks for the maturities, respectively.
When underwriting corporate bonds, dealers on Wall Street typically try to lock in borrowing costs. A dealer sells Treasuries as a hedge during that process to lock in the bond issue’s borrowing cost before the deal is completed.
To get out of the rate lock, the dealer purchases Treasuries after the bond is sold. We are at the lower end of the yield range. We tend to see a little sell-off when you see corporate supply as a factor. The 30-year Treasury bond’s yield increased by 5.5 basis points to 3.804 percent. In the end, the U.S. Treasury Inflation-Protected Securities (TIPS) breakeven rate for five years was 2.358%.
Last time, the 10-year TIPS breakeven rate was 2.267%, indicating that the market anticipates inflation of approximately 2.3% per year for the next ten years. The most recent value of the U.S. dollar 5-year forward inflation-linked swap was 2.465%.
Due to the possibility of distortions brought about by the Fed’s quantitative easing, some people believe that the swap is a better indicator of inflation expectations.
November 29th, 3:47 PM New York time (2047 GMT) Change in Current Net Yield% (bps) 3-month invoices 4.27 4.3771 -0.025 expenses for six months 4.5525 4.7245 -0.010 100-7/256, 4.4856, 0.015-year note. Note for 3 years 100-174/256 4.2524 0.022 99-194/256 5 note 3.9288 0.037 Note for 7 years, 100-28/256, 3.85
