U.S. 10 Year Treasury – Page 3

Veteran investor David Roche says a credit crunch is coming for ‘small-town America’

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A home in Lynch, Kentucky.

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The banking turmoil of March, which saw the collapse of several regional U.S. lenders, will lead to a credit crunch for “small-town America,” according to veteran strategist David Roche.

The collapse of Silicon Valley Bank and two other small U.S. lenders last month triggered contagion fears that led to record outflows of deposits from smaller banks.

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Earnings reports last week indicated that billions of dollars of deposit outflows from small and mid-sized lenders, executed amid the panic, were redirected to Wall Street giants — with JPMorgan Chase, Wells Fargo and Citigroup reporting massive inflows.

“I think we’ve learned that the big banks are seen as a safe haven, and the deposits which flow out of the small and regional banks flow into them (big banks), but we’ve got to remember in a lot of key sectors, the smaller banks account for over 50% of lending,” Roche, president of Independent Strategy, told CNBC’s “Squawk Box Europe” on Thursday.

“So I think, on balance, the net result is going to be a further tightening of credit policy, of readiness to lend, and a contraction of credit to the economy, particularly to the real economy — things like services, hospitality, construction and indeed small and medium-sized enterprises — and we’ve got to remember that those sectors, the kind of small America, small-town America, account for 35 or 40% of output.”

Veteran investor David Roche sees further contraction of credit to 'small America'

The ripple effects of the collapse of Silicon Valley Bank were vast, setting in motion a chain of events that eventually led to the collapse of 167-year-old Swiss institution Credit Suisse, and its rescue by domestic rival UBS.

Central banks in Europe, the U.S. and the U.K. sprang into action to reassure that they would provide liquidity backstops, to prevent a domino effect and calm the markets.

Roche, who correctly predicted the development of the Asian crisis in 1997 and the 2008 global financial crisis, argued that, alongside their efforts to rein in sky-high inflation, central banks are “trying to do two things at once.”

“They’re trying to keep liquidity high, so that the problems of deposit withdrawals and other problems relating to mark-to-market of assets in banks do not cause more crises, more threats of systemic risk,” he said.

“At the same time, they’re trying to tighten monetary policy, so, in a sense, you’ve got a schizophrenic personality of every central bank, which is doing with the right hand one thing and doing with the left hand the other thing.”

Expect more issues in the banking sector, but not a full-blown crisis, strategist says

He predicted that this eventually results in credit tightening, with fear transmitting to major commercial banks that receive fleeing assets and “don’t want to be caught up in a systemic crisis” and will be more cautious on lending.

Roche does not anticipate a full-scale recession for the U.S. economy, although he is convinced that credit conditions are going to tighten. He recommended investors should take a conservative approach against this backdrop, parking cash in money market funds and taking a “neutral to underweight” position on stocks, which he said were at the “top of the crest” of their latest wave.

“We will probably go down from here, because we will not get rapid cuts in interest rates from central banks,” he said.

He added that 10-year U.S. Treasurys were “reasonably safe” at the moment, as are long position on the Japanese yen and short on the U.S. dollar.

Investors assume long positions by buying assets whose value they expect to increase over time. Short positions are held when investors sell securities they do not own, with the expectation of purchasing them at a later date at a lower price.

Despite commodities not yielding much this year, Roche is sticking to long calls on grains, including soya, corn and wheat.

“Beyond the geopolitical risks which are still there, the supply and demand balances for those products looking out five years is very good,” he said.

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April 20, 2023

Treasury yields little changed as focus remains on economic outlook, earnings

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John Zich | Bloomberg | Getty Images

U.S. Treasury yields were little changed on Tuesday, as investors continued to assess the outlook for the U.S. economy and digested the latest round of corporate earnings.

As of around 2:20 a.m. ET, the yield on the benchmark 10-year Treasury note was fractionally higher at 3.5946% while the yield on the 30-year Treasury bond also nudged marginally upwards to 3.8080%. Yields move inversely to prices.

Corporate earnings season dominates this week’s agenda, with giants Johnson & Johnson, Bank of America and Goldman Sachs all set to report before the opening bell on Wall Street on Tuesday.

On the data front, traders will have an eye on the March housing starts and building permits figures due at 8:30 a.m. ET. Housing starts for the month are expected to have fallen by 3.4% to 1.40 million units, according to Dow Jones consensus estimates, while building permits are projected to drop by 4.9% to 1.45 million units.

Markets are closely following economic data for a read on where the Federal Reserve might take interest rates at its next meeting in early May. More than 84% of traders are calling a 25 basis point hike at the next policy meeting, according to CME Group’s FedWatch tool.

An auction will be held Tuesday for $34 billion of 52-week Treasury bills.

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April 17, 2023

China’s banking troubles are not the same as Silicon Valley Bank, economist says

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A Silicon Valley Bank office is seen in Tempe, Arizona, on March 14, 2023. – With hindsight, there were warning signs ahead of last week’s spectacular collapse of Silicon Valley Bank, missed not only by investors, but by bank regulators. Just why the oversight failed remained a hot question among banking experts, with some focusing on the weakness of US rules. (Photo by REBECCA NOBLE / AFP) (Photo by REBECCA NOBLE/AFP via Getty Images)

Rebecca Noble | Afp | Getty Images

BO’AO, China — China’s small banks have problems — but they don’t carry the same risks as those exposed by the collapse of Silicon Valley Bank, said Zhu Min, vice president of the China Center for International Economic Exchanges, a state-backed think tank.

Issues at a handful of smaller Chinese banks have emerged in the last few years.

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Baoshang Bank went bankrupt, while some rural banks in Henan province froze accounts, prompting protests by customers worried about their savings.

Those banks’ problems reflect local issues, Zhu said Wednesday. He pointed out that while those Chinese banks’ structure and operations were unclear, they did not pose systemic risks to the broader economy.

After the last three to four years of Chinese regulatory action, the situation has also improved, Zhu said.

China’s major banks — known as the big five — are owned by the central government and rank among the largest in the world.

On the other hand, SVB reflects a macro risk, Zhu said, noting the U.S. mid-sized lender had adequate capital and liquidity before it collapsed.

Macro risks present a much more worrisome problem, he explained. The banking crisis in the U.S. involved a structural risk from savers moving funds to take advantage of higher interest rates, Zhu pointed out.

The U.S. Federal Reserve has aggressively hiked interest rates in an attempt to ease decades-high inflation in the country. The U.S. dollar has strengthened against other currencies, while Treasury yields have risen to multi-year highs.

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The current U.S. banking problem contrasts with the 2008 financial crisis that stemmed from Lehman Brothers’ exposure to mortgage-backed securities, he added.

Zhu, formerly deputy managing director of the International Monetary Fund, was speaking with reporters on the sidelines of the Boao Forum for Asia on Wednesday. The annual event hosted by China is sometimes considered Asia’s version of Davos.

The forum this year emphasized the need for cooperation amid global uncertainty — and highlighted China’s relative stability in its emergence from the pandemic.

China’s economy in 2022 grew by just 3%, the slowest pace in decades, as the real estate slump and Covid controls weighed on growth. The country ended its stringent zero-Covid policy late last year, and has been trying to attract foreign business investment.

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Consumption remains a clear weak spot in China’s economy, Zhu said. He expects advanced manufacturing and China’s push for reducing carbon emissions to remain growth drivers.

Private, non-state-owned companies have taken the lead in China’s so-called green transformation, Zhu said.

Chinese President Xi Jinping and new Premier Li Qiang have spoken repeatedly in the last few weeks about support for privately run businesses.

Xi has said he saw increased unity under the ruling Chinese Communist Party as necessary for building up the country.

New rules released this month give the party a more direct role in regulating China’s financial industry.

Zhu said he expects this overhaul to streamline financial oversight, and warned of a period of adjustment. However, he said that overall, it would make financial regulation more efficient and transparent in China.

Correction: This story has been updated to accurately reflect that China’s major banks are known as the big five.

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March 30, 2023

The Street awaits key inflation report next week as banking worries persist

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Another week, another important piece of inflation data for the market to digest. The personal spending and income report, out this coming Friday, has the Federal Reserve’s preferred measure of inflation: the core personal consumption expenditure (PCE) price index. The Fed likes this reading because it looks at changes in consumer behavior, including whether buyers are substituting goods based on prices. In comparison, the consumer price index (CPI), released this past week, only tracks price changes over time. The PCE price index report is even more important following the Fed’s decision this week to raise rates by 25 basis points, as the Street tries to determine the likelihood of the central bank pulling off a soft landing, or if it is hiking us into a recession. It was a positive week for the major averages, despite some midweek volatility driven by comments from Treasury officials. In his remarks after the rate decision, Fed Chair Jerome Powell said a rate cut by year-end was not the committee’s base case, meaning he doesn’t see a rate cut in 2023. Shortly thereafter, Treasury Secretary Janet Yellen, speaking to the Senate Appropriations subcommittee, appeared to double back on the idea that all bank deposits nationwide would be guaranteed by the U.S. government, pushing stocks lower. The PCE price index and other inflation reports face heightened scrutiny in the coming months as the market is becoming more at odds with the Fed’s base case. Consider the CME FedWatch Tool , which tracks market experts’ expectations, shows a pause at the May meeting (88% probability), followed by a cut of 25-50 basis points at the July meeting. The market is now placing the highest likelihood on the U.S. entering 2024 somewhere in the 375-425 basis-point range, well below the current target rate of 475-500. Part of the reason behind the market’s unwillingness to accept the Fed’s commentary likely comes from two key factors. First, there is the view that the Fed is looking at where we are now and not so much where we are headed. The Fed tends to focus on backward-looking macroeconomic updates, while the market looks at real-time commodity price fluctuations, along with forward-looking updates from corporate management teams during earnings calls and investor conferences. Second, there are mounting concerns about the banking sector. While the magnitude of the problem is up for debate, most experts agree that the Silicon Valley Bank blowup and resulting tightening of lending standards by the banks will constrain financial conditions overall. “Financial conditions seem to have tightened, and probably by more than the traditional indexes say. … The question for us though is how significant will that be — what will be the extent of it, and what will be the duration of it,” said Powell. Exactly how many basis points of tightening these stricter lending standards are equivalent to remains to be seen. However, the Fed was certainly not factoring the banking turmoil into its thinking a month ago and as a result, many believe that the Fed will have to reverse course. Put another way, if the banking crisis is worth 100 basis points of tightening, then the Fed may have gone 100 basis points too far without being able to know it. Therefore, the thinking would be that they need to cut by 100 basis point in order to get back on track. Whether Powell or the market proves to be correct will depend entirely on the path of inflation. Prices alone will determine where interest rates will go. No portfolio companies reported earnings this past week and none are on next week’s calendar. However, here are some other earnings and economic numbers to watch in the week ahead: Monday, March 27 Before the bell: BioNTech (BNTX), Carnival (CCL) After the bell: PVH Corp (PVH) Tuesday, March 28 Before the bell: Core & Main (CNM), Elbit Systems (ESLT), IHS (IHS), McCormick & Co (MKC), Walgreens Boots Alliance (WBA) After the bell: Cal-Maine Foods (CALM), Dave & Busters (PLAY), Jefferies Financial (JEF), Lululemon (LULU), Micron (MU) 10 a.m. ET: Consumer Confidence Wednesday, March 29 Before the bell: Cintas (CTAS), Paychex (PAYX) After the bell: Concentrix Corp (CNXC), HB Fuller (FUL), RH (RH) 10 a.m. ET: Pending Home Sales Thursday, March 30 Before the bell: AngioDynamics (ANGO) After the bell: Skillz (SKLZ), BlackBerry Ltd. (BB) 8:30 a.m. ET: Initial Claims 8:30 a.m. ET: Gross Domestic Product; Price Index Friday, March 31 Before the bell: 8:30 a.m. ET: Personal Spending & Income 8:30 a.m. ET: Personal Consumption Expenditures Club trades of the week Despite oversold conditions in the market this past week, as measured by our trusted S & P 500 Short Range Oscillator , we were cautious. We made only one buy : 25 shares of Pioneer Natural Resources (PXD), bringing ownership position in PXD to 175 shares and increasing its portfolio weighting to 1.26% from 1.09%. Sometimes an exogenous event, like a banking crisis, trumps our discipline to buy enthusiastically when the Oscillator flashes oversold. Looking back One day before Wednesday’s Fed rate hike and the dueling bank comments from Powell and Yellen that confused and sunk markets that day, February existing home sales were reported Tuesday to have jumped a much stronger than expected 14.5%. It was the first monthly increase in a year and the largest increase since July 2020. Buyers came back into the housing market as mortgage rates followed bond yields lower on the banking troubles. On Thursday, initial jobless claims for the week ending March 18 came in at 191,000, a decrease of 1,000 from the prior week and below the 197,000 expected. Also Thursday, we learned that in February, new home sales increased 1.1% month over month, to a seasonally adjusted annual rate of 640,000. That was a tad below the 650,000 rate analysts were looking for. As for the broader market this past week, the S & P 500 Communication Services sector led to the upside followed by Energy and Materials. Real Estate led to the downside followed by Utilities. The U.S. dollar index hovered just above 103. Gold traded at nearly $2,000 per ounce. West Texas Intermediate crude prices remained in the upper-$60s per barrel region. The yield on the 10-year Treasury eased back slightly to just under 3.4%. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust is long.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

US Treasury Secretary Janet Yellen testifies before the Senate Finance Committee on the proposed budget request for 2024, on Capitol Hill in Washington, DC, March 16, 2023.

Andrew Caballero-reynolds | AFP | Getty Images

Another week, another important piece of inflation data for the market to digest.

The personal spending and income report, out this coming Friday, has the Federal Reserve’s preferred measure of inflation: the core personal consumption expenditure (PCE) price index. The Fed likes this reading because it looks at changes in consumer behavior, including whether buyers are substituting goods based on prices. In comparison, the consumer price index (CPI), released this past week, only tracks price changes over time.

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March 25, 2023

BlackRock’s Rieder says more volatility could ‘play through the financial system’

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March 21, 2023

2-year Treasury yield posts biggest 3-day decline since aftermath of 1987 stock crash

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Investors swarmed into U.S government bonds Monday after the collapse of Silicon Valley Bank and subsequent government backstop of the banking system. The rush sent Treasury yields tumbling.

The yield on the 2-year Treasury was last trading at 4.005%, down nearly 59 basis points. (1 basis point equals 0.01%. Prices move inversely to yields.)

The yield has fallen around 100 basis points, or a full percentage point, since Wednesday, marking the largest three-day decline since Oct. 22, 1987, when the yield fell 117 basis points. That move followed the Oct. 19, 1987 stock market crash — known as “Black Monday” in which the S&P 500 plunged 20% for its worst one-day drop. The move was bigger than the 2-year yield slide of 63 basis points that took place in three days following the 9/11 attacks.

The yield on the 10-year Treasury was down by more than 15 basis points at 3.543%.

Prices jumped and yields fell amid the collapse of Silicon Valley Bank that began last Thursday. Regulators had taken over the bank on Friday after mass withdrawals on Thursday led to a bank run. On Sunday, regulators announced they would backstop Silicon Valley Bank’s depositors.

As fears about contagion across the banking sector spiked, many investors looked to government bonds and other traditionally safer assets.

The financial shock also caused investors to rethink how aggressive the Federal Reserve will continue to be with rate hikes, helping to send short-term yields lower. The central bank is meeting next week and was largely expected to raise rates for a ninth time since March of last year — but that was before Silicon Valley Bank’s collapse happened last week.

Goldman Sachs no longer thinks the Fed will hike rates, citing “recent stress” in the financial sector. However, traders are pricing in about 2-to-1 odds that the Fed raises its benchmark borrowing rate by 0.25 percentage point at the March 21-22 meeting.

And the market is also anticipating that by the end of the year, the central bank will lop off 0.75 percentage point in cuts, taking the rate down to a target range of 4%-4.25%. Current pricing indicates a terminal rate of 4.75% by May.

“In the wake of SVB, interest rate yields have gone lower and will most likely continue to go lower as the Fed’s hand is being forced to be less hawkish in the coming months while the banking sector uncertainty plays out,” said Jeff Kilburg, founder & CEO of KKM Financial.

The 2-year Treasury yield rose to 5.085% last week, its highest since June 2007 before the sudden decline.

U.S. 2-year Treasury yield

Investors also braced themselves for a series of key inflation data due this week. February’s consumer price inflation report, including the latest reading of the core inflation rate, is expected Tuesday, followed by wholesale inflation data on Wednesday.

That comes after Federal Reserve Chairman Jerome Powell indicated last week that the central bank’s upcoming interest rate decision would be “data-dependent.” Powell also suggested that interest rates would likely go higher than expected as the Fed’s battle with inflation continues.

Citigroup economists think the Fed will follow through with a 25 basis-point increase next week rather than hold off in response to the banking tumult.

“Doing so would invite markets and the public to assume that the Fed’s inflation fighting resolve is only in place up to the point when there is any bumpiness in financial markets or the real economy,” Citi economist Andrew Hollenhorst said in a client note.

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March 13, 2023

Mortgage rates tumble in the wake of bank failures

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A residential neighborhood in Austin, Texas, on Sunday, May 22, 2022.

Jordan Vonderhaar | Bloomberg | Getty Images

The average rate on the popular 30-year fixed mortgage dropped to 6.57% on Monday, according to Mortgage News Daily. That’s down from a rate of 6.76% on Friday and a recent high of 7.05% last Wednesday.

Mortgage rates loosely follow the yield on the 10-year Treasury, which fell to a one-month low in response to the failures of Silicon Valley Bank and Signature Bank and the ensuing ripple through the nation’s banking sector.

In real terms, for a buyer looking at a $500,000 home with a 20% down payment on a 30-year fixed mortgage, the monthly payment this week is $128 less than it was just last week. It is still, however, higher than it was in January.

So what does this mean for the spring housing market?

In October, rates surged over 7%, and that started the real slowdown in home sales. But rates then started falling in December and were near 6% by the end of January. That caused a surprising 8% monthly jump in pending home sales, which is the National Association of Realtors’ measure of signed contracts on existing homes. Sales of newly built homes, which the Census Bureau measures by signed contracts, also surged far higher than expected.

While the numbers for February are not in yet, anecdotally, agents and builders have said sales took a big step back in February as rates shot higher. So if rates continue to drop now, buyers could return once again — but that’s a big “if.”

“This mini banking crisis has to drive a change in consumer behavior in order to have a lasting positive impact on rates. It’s still all about inflation,” said Matthew Graham, chief operating officer at Mortgage News Daily.

Markets now have to contend with the “inflationary impact of consumer fear,” he added, noting that Tuesday brings a fresh consumer price index report, a monthly measure of inflation in the economy.

As recently as last week, Federal Reserve Chairman Jerome Powell told members of Congress that the latest economic data has come in stronger than expected.

“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” Powell said.

While mortgage rates don’t follow the federal funds rate exactly, they are heavily influenced by both the Fed’s monetary policy and its thinking on the future of inflation.

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March 13, 2023

Treasury yields leap after much hotter jobs report than expected

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U.S. Treasury yields rose Friday after jobs data came in much better than expected.

The 10-year Treasury yield was up more than 12 basis points at 3.526%. The 2-year Treasury was up roughly 20 basis points to 4.299%.

Yields and prices move in opposite directions and one basis point equals 0.01%.

Nonfarm payrolls increased by 517,000 for January, notably above the 187,000 additions estimated by Dow Jones. The unemployment rate fell to 3.4%, lower than the 3.6% expected by Dow Jones.

The data underscored the stickiness of the labor market. The Fed has been trying to cool the economy through monetary policy measures, including interest rate hikes. At the conclusion of its latest meeting on Wednesday, the central bank increased rates by 25 basis points, but also said it was starting to see a slight slowdown of inflation.

— CNBC’s Alex Harring contributed to this report.

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February 3, 2023

Did the market already show its hand in the first week of 2023? What we’ve learned so far

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January 7, 2023

The Fed won’t be what drives markets in 2023, wealth manager says

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The Federal Reserve played a major role in moving markets in 2022, driving a campaign of monetary tightening as it tried to combat inflation that hit multi-decade highs.

Many who had money in stocks and even bonds suffered, as liquidity was sucked out of the market with every rate hike employed by the Fed — seven of them in the past year alone. In mid-December, the central bank rose its benchmark interest rate to the highest level in 15 years, taking it to a targeted range between 4.25% and 4.5%.

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Prior to that, the U.S. saw a four consecutive three-quarter point hikes — the most aggressive policy decisions since the early 1980s.

Fed officials and economists expect rates to stay high next year, with reductions unlikely until 2024. But that doesn’t mean the Fed will remain the primary driver of the markets. Patrick Armstrong, chief investment officer at Plurimi Wealth LLP, sees different financial drivers retaking the reins.

“Next year I think it’s not going to be the Fed determining the market. I think it’s going to be companies, fundamentals, companies that can grow earnings, defend their margins, probably move higher,” Armstrong told CNBC’s “Squawk Box Europe” on Friday.

“Bond yields are giving you a real return now, above inflation. So it’s a reasonable place to put capital now, whereas at the start of this year it didn’t make much sense. It was hard to expect a return above inflation where yields were.”

The yield on the U.S. 10-year Treasury was at 3.856% on Friday, a rapid climb from 1.628% at the start of 2022. The yield on the benchmark note hit an all-time low of 0.55% in July 2020. Bond yields move inversely to prices.

Screens on the trading floor at New York Stock Exchange (NYSE) display the Federal Reserve Chair Jerome Powell during a news conference after the Federal Reserve announced interest rates will raise half a percentage point, in New York City, December 14, 2022.

Andrew Kelly | Reuters

“What happened this year was driven by the Fed,” Armstrong said. “Quantitative tightening, higher interest rates, they were pushed by inflation, and anything that was liquidity driven sold off. If you were equities and bond investors, came into the year getting less than a percent on a 10-year Treasury which makes no sense. Liquidity was the driver of the market, [and] the liquidity, the carpet’s been pulled from underneath investors.”

Armstrong did suggest that the U.S. may be “flirting with recession probably by the end of the first half of next year,” but noted that “it’s a very strong job market there, wage growth and consumption is 70% of the U.S. economy, so it’s not even sure that the U.S. does fall into recession.”

Key for 2023, the CIO said, will be “to find companies that can defend their margins. Because that is the real risk for equities.”

He noted that analysts have a 13% profit margin expectation for the S&P 500 in 2023, which is a record high.

But inflation and Fed tightening can still present a challenge to that, Armstrong maintained.

“I don’t think you can achieve that with a consumer that’s having their purses pulled in so many directions, from energy costs, mortgage costs, food prices, and probably dealing with a little bit of unemployment starting to creep up as the Fed continues to hike, and it’s designed to destroy demand,” Armstrong said. “So I think that is going to be the key in equities.”

— CNBC’s Jeff Cox contributed to this report.

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December 30, 2022

Bank of Japan shocks global markets with bond yield shift

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The Bank of Japan on Tuesday shocked global markets by widening the target range for its 10-year government bond yield.

Kazuhiro Nogi | Afp | Getty Images

Global markets were jolted overnight after the Bank of Japan unexpectedly widened its target range for 10-year Japanese government bond yields, sparking a sell-off in bonds and stocks around the world.

The central bank caught markets off guard by tweaking its yield curve control (YCC) policy to allow the yield on the 10-year Japanese government bond (JGB) to move 50 basis points either side of its 0% target, up from 25 basis points previously, in a move aimed at cushioning the effects of protracted monetary stimulus measures.

In a policy statement, the BOJ said the move was intended to “improve market functioning and encourage a smoother formation of the entire yield curve, while maintaining accommodative financial conditions.”

The central bank introduced its yield curve control mechanism in September 2016, with the intention of lifting inflation toward its 2% target after a prolonged period of economic stagnation and ultralow inflation.

The BOJ — an outlier compared with most major central banks — also left its benchmark interest rate unchanged at -0.1% on Tuesday and vowed to significantly increase the rate of its 10-year government bond purchases, retaining its ultra-loose monetary policy stance. In contrast, other central banks around the world are continuing to hike rates and tighten monetary policy aggressively in an effort to rein in sky-high inflation.

The YCC change prompted the yen and bond yields around the world to rise, while stocks in Asia-Pacific tanked. Japan’s Nikkei 225 closed down 2.5% on Tuesday afternoon. The 10-year JGB yield briefly climbed to more than 0.43%, its highest level since 2015.

By midafternoon in Europe, the U.S. dollar was down 3.3% against the surging yen. The yen’s rally saw the currency notch the biggest single-day gain against the U.S. dollar since March 1995 (27 years, eight months, 20 days), according to FactSet currency data.

U.S. Treasury yields spiked, with the 10-year note climbing by around 7 basis points to just below 3.66% and the 30-year bond rising by more than 8 basis points to 3.7078%. Yields move inversely to prices.

Shares in Europe retreated initially, with the pan-European Stoxx 600 shedding 1% in early trade before recovering most of its losses by late morning. European government bonds also sold off, with Germany’s 10-year bund yield up almost 7 basis points to trade at 2.2640%, having slipped from its earlier highs.

‘Testing the water’

“The decision is being read as a sign of testing the water, for a potential withdrawal of the stimulus which has been pumped into the economy to try and prod demand and wake up prices,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

“But the Bank is still staying firmly plugged into its bond purchase program, claiming this is just fine tuning, not the start of a reversal of policy.”

That sentiment was echoed by Mizuho Bank, which said in an email Tuesday that the market moves reflect a sudden flurry of bets on a hawkish policy pivot from the BOJ, but argued that the “popular bet does not mean that is the policy reality, or the intended policy perception.”

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“Fact is, there is nothing in the fundamental nature of the move or the accompanying communique that challenges our fundamental view that the BoJ will calibrate policy to relieve JPY pressures, but not turn overtly hawkish,” said Vishnu Varathan, head of economics and strategy for the Asia and Oceania Treasury Department at Mizuho.

“For one, there was every effort made to emphasize that policy accommodation is being maintained, whether this was in reference to intended as well as potential step-up in bond purchases or suggesting no further YCC target band expansion (for now).”

Spikes in volatility

The Bank of Japan noted in its statement that since early spring, market volatility around the world had risen, “and this has significantly affected these markets in Japan.”

“The functioning of bond markets has deteriorated, particularly in terms of relative relationships among interest rates of bonds with different maturities and arbitrage relationships between spot and futures markets,” it added.

The central bank said if these market conditions persisted, it could have a “negative impact on financial conditions such as issuance conditions for corporate bonds.”

Luis Costa, head of CEEMEA strategy at Citi, indicated on Tuesday that the market move may be an overreaction, telling CNBC there was “absolutely nothing stunning” about the BOJ’s decision.

“You have to take this BOJ measure in the context of a positioning in dollar-yen that was obviously not expecting this tweak. It’s a tweak,” he said.

Japanese inflation is projected to come in at 3.7% annually in November, according to a Reuters poll last week — a 40-year high, but still well below the levels seen in comparable Western economies.

Costa said the Bank of Japan’s move was not geared toward combating inflation but addressing the “infrastructure and the dynamics of JGB trading” and the gap in volatility between the trade in JGBs and the rest of the market.

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December 20, 2022

Stock market rally will be put to test in week ahead, after yields fall and tech surges

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November 11, 2022

Mortgage rates fall sharply to under 7% after inflation eases

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Mortgage rates fell sharply Thursday after a government report showed that inflation had cooled in October, prompting a decline in bond yields.

The average rate on the 30-year fixed plunged 60 basis points from 7.22% to 6.62%, according to Mortgage News Daily. That matches the record drop at the start of the Covid 19 pandemic. The rate, however, is still more than double what it was at the start of this year.

In turn, stocks of homebuilders such as Lennar, DR Horton and Pulte jumped, along with broader market gains. Those stocks have been hammered by the sharp increase in rates over the past six months.

The Consumer Price Index rose in October at a slower pace than expected. As a result, bond yields dropped sharply, and mortgage rates followed, as they follow loosely the yield on the 10-year Treasury.

So what happens next?

“This is the best argument to date that rates are done rising, but confirmation requires next month’s CPI to tell the same story,” said Matthew Graham, chief operating officer of Mortgage News Daily. “This was always about needing two consecutive reports of this nature combined with acknowledgement from the Fed that the inflation narrative is shifting.”

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But Graham said rates are not out of the woods yet. They are also unlikely to move dramatically lower, as there is still plenty of economic uncertainty both in U.S. and global financial markets.

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November 10, 2022