Crossroads
QRA Band-Aid, Revisiting the '94 analog with a focus on banks, CPI preview
Crossroads
(BN) US 30Y BONDS DRAW 4.769% VS 4.716% PRE-SALE WHEN-ISSUED YIELD
(BN) FED REVERSE REPO USAGE BELOW $1T FOR FIRST TIME IN TWO YEARS
Shortly after we began writing this week’s note, these two headlines appeared on our Bloomberg terminal. Together, they underscored the assertion in last week’s note, which we placed outside the paywall, ‘There's a New Sheriff in Town’, that the Treasury financing plans intended to stabilize longer maturity Treasuries were not likely to succeed. Specifically, the increases in bill issuance above the Treasury Borrowing Advisory Committee (TBAC) were likely to clash with banks hoarding reserves and plunging balances in the RRP program, and would tighten liquidity sooner than the Treasury and FOMC expect. The long end of the market remains ‘orphaned’, until and unless the FOMC disinverts the Treasury curve by cutting rates, either because it becomes clear they are closer to succeeding on their inflation mandate, or (more likely in the near term) they begin falling short of their full employment mandate, there are few buyers for long maturity Treasuries or the $9 trillion mortgage market. The drift higher in the equity market and grind lower in implied volatility was on shaky ground following the exceptionally weak 30-year auction, but both came to an abrupt halt when Chairman Powell delivered remarks at an IMF event that appeared intended to deliver the message, ‘stop reading between the lines, I told you we might not be done, and I wasn’t kidding’. Still, the recovery rally on Friday was impressive hinting that seasonality and the monetary policy put are changing the balance of risks for equity investors.
There were only two data points of consequence to monetary policy this week: a modest easing of wage pressure from the October Atlanta Fed Wage Tracker, and another increase in continuing jobless claims in the last week of October bringing the increase from the first week of September to 176,000. Neither the increase in continuing claims, the easing of wage pressure, nor last week’s October employment report, appear to have convinced the FOMC leadership that softer demand for labor risks an overshoot, at least not yet.