Marketmind: To 5% and beyond, bond yields soar
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[October 19, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan
A buoyant U.S. economy, hawkish Federal Reserve and dysfunctional
Congress are sending Treasury bond yields soaring through 5% and beyond,
hobbling a stock market trying to parse a mixed earnings picture from
Wall Street megacaps.
For all the added risk of a renewed Middle East conflict, energy prices
remained contained - in part due a brighter crude supply picture as
Washington lifted some sanctions on long-absent major oil exporter
Venezuela.
The company earnings picture, meantime, was mixed to sour over the past
24 hours in both the U.S. and Europe. Frankfurt-listed Tesla shares fell
5.1% after the EV maker missed margin forecasts, while digital streaming
giant Netflix surged 12.5% after beating Street estimates for new
customers.
But the sheer strength of this week's U.S. retail, industrial and -
again on Wednesday - housing construction readouts have combined with a
persistently hawkish Fed message on 'higher for longer' interest rates.
Despite decent demand at a typically awkward 20-year bond auction on
Wednesday, yields continued to spiral higher overnight and ahead of Fed
Chair Jerome Powell's key speech later on Thursday.
Adding to the market angst was the hiatus over the vacant House speaker
role in Congress as right-wing Republican Jim Jordan failed for the
second time to get enough votes from his own party to take the position.
The ongoing vacuum raises fears for any movement on spending bills and
reignites fears of a government shutdown next month.
And to add insult to injury, there were some signs of Chinese entities
winding down another $16 billion of their Treasury holdings through
August to the lowest level since 2009 - likely banking much of them for
now in dollar cash instruments.
Although ongoing official support for the weakening yuan may have been a
factor, this sort of shift in the now $805 billion stash has long been a
background fear in the Treasury market amid the increasingly tense
geopolitical standoff between the world's two biggest economies.
A similar concern smolders about Japan's Treasury holdings as the yen
weakens close to 150 per dollar and the prospect of Bank of Japan dollar
selling intervention heightens.
The upshot of all factors has seen Treasury yields climb ever higher
through the night - with two-year and 20-year yields now both above
5.25%, the latter at a record high and the former the highest since
2006. Thirty-year yields are also now above 5% and hit a 16-year high at
5.06% on Thursday.
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Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., September 26, 2023. REUTERS/Brendan McDermid/File
Photo
Ten and five-year tenors also saw yields soar to within a hair's
breadth of 5% early on Thursday too. The yield curve continued to
'bear steepen' to show its shallowest inversion between two and
10-year yields in more than a year and actually in positive
territory between two and 20 years.
According to the Mortgage Bankers Association, the average contract
rate on a 30-year fixed-rate mortgage rose to 7.70% last week, the
highest since November 2000.
The ructions in the bond market and incoming earnings saw Wall St
indexes hit their lowest in 10 days on Wednesday and futures were in
the red again ahead of the open today.
Overseas, Chinese stocks hit a new low for the year on Thursday amid
dwindling market confidence there and as foreign capital recorded
net outflows of 11.7 billion yuan ($1.60 billion) via the northbound
trading route, the largest daily outflow in two months.
China's biggest private property developer Country Garden has still
not paid a coupon on a bond after a 30-day grace period, according
to bondholders who are now seeking talks. Non-payment would put the
developer at risk of default.
The offshore yuan fell to its lowest in more than a month.
Key developments that should provide more direction to U.S. markets
later on Thursday:
* U.S. corporate earnings: Blackstone, Fifth Third Bancorp, Philip
Morris, Union Pacific, AT&T, CSX, Freeport-McMoRan, Truist
Financial, American Airlines, Alaska Air, Intuitive Surgical,
KeyCorp, Snap-On, Pool, Genuine Parts
* U.S. Oct Philadelphia Fed business survey, Sept existing home
sales, weekly jobless claims* U.S. Federal Reserve Chair Jerome
Powell, Fed Vice Chair Philip Jefferson, Fed Vice Chair for
Supervision Michael Barr, Dallas Fed President Lorie Logan, Chicago
Fed chief Austan Goolsbee, Atlanta Fed chief Raphael Bostic and
Philadelphia Fed chief Patrick Harker all speak
* U.S. Treasury auctions 5-year inflation-protected notes, 4-week
bills
(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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