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CONTROL PACKAGE
Remember when "developed world" central banks pretended their inflation target was 2%? Well, that lie died a miserable death today - and will do so again for good measure tomorrow - after the BOC cut rates for the first time in 4 years, and less than a year after its last rate hike, from 5.0% to 4.75% even as Canada's inflation remains a very sticky 2.7%.
And just to underscore the death of the 2% inflation target, tomorrow the ECB will also cut rates for the first time since March 2016, (and 8 months after the last rate hike), even though core Eurozone CPI remains 3%.
Of course, despite all the posturing, the Fed won't be far behind especially once it becomes clear that the myth of strong US job growth was just a mirage, and either in July or September, the Fed will join the party despite core US inflation stuck at a blistering 2.8%.
It was this long overdue realization that the G7 central banks have officially raised their inflation target by about 1% that helped pushed bond yields to fresh two month lows, and down more some 35bps in just the past week, down for a 5th straight day as financial conditions have eased dramatically (see chart of Goldman Financial Conditions Index above), undoing any jawboned tightening the Fed tried to inject into the market in recent months: indeed, the latest rate pricing shows a sharp dovish shift in the Fed cut narrative for Sept, rising to 80% vs 45% just one week ago. As Goldman's trader notes, CTAs will become a focus if yields keep moving lower. -- Tyler Durden
There are FIVE charts we have outlined in prior chart packages that we will continue to watch closely as a CURRENT "control set":
- The 10Y TREASURY NOTE YIELD - TNX - HOURLY (CHART LINK)
- The 10Y TREASURY NOTE YIELD - TNX - DAILY (CHART LINK)
- The 10Y TREASURY NOTE YIELD - TNX - WEEKLY (CHART LINK)
- The 30Y TREASURY BOND YIELD - TNX - WEEKLY (CHART LINK)
- REAL RATES (CHART LINK)
FISHER'S EQUATION = 10Y Yield = 10Y INFLATION BE% +REAL % = 2.188% + 2.031% = 4.219%
3YR AUCTION: The US sold USD 53bln of 3yr notes at a high yield of 4.559%, tailing the When Issued by 1.1bps, much larger than the six auction average of a tail of 0.1bps and prior stop-through of 0.3bps. The B/C was also weak at 2.43x, beneath the 2.63x prior and 2.57 six auction average. The soft reception was led by a drop in direct demand which came in beneath the prior average, but indirect demand was relatively stable at 64%, albeit not enough to offset the drop in direct demand, seeing dealers take a chunky 20% of the auction. The soft 3yr auction added to the soft 2yr, 5yr, and 7yr supply recently, with participants perhaps sitting on the sidelines ahead of key risk events like the US CPI and FOMC on Wednesday.
10-YEAR REVIEW: A very strong 10-year note auction. The US sold USD 39bln of 10yr notes at a high yield of 4.438%, stopping through the 4.458% WI by 2bps vs the prior and six auction averages of a tail of 1.1bps, also showing the largest stop-through since February 2023. The B/C of 2.67x was also stronger than the prior and six auction average of c. 2.50x. The breakdown of bidders saw a huge increase in indirect demand, rising to 74.6% from 65.5%, well above the 65.4% average. Direct demand dipped to 13.8% from 18.7%, falling beneath the 17.53% average, but the huge Indirect takedown saw dealers (forced surplus buyers) left with just 11.6% of the auction, beneath the 15.7% prior and 17.03% average. The strong 10-year note auction is on the heels of a slew of disappointing short-end and belly auctions, perhaps with uncertainty around the Fed/inflation keeping participants on the sidelines in the more Fed-exposed part of the curve and opting for longer-dated supply instead. The strong demand comes despite the huge event risk on Wednesday - which tends to see buyers take a step back - with both US CPI and the FOMC rate decision with accompanying Dot Plots due. There is the 30-year Bond auction on Thursday too, post Fed and CPI. Note, that analysts also highlight with bond volatility at the low end of multi-year ranges. It is likely that supported some buyers to step in.
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