Good Morning on this Fantastic Friday,
Lots to share, especially for a Friday.
Data out today was strong (housing starts and permits both beat estimates as did consumer sentiment). Bonds don’t care. They shrugged off the news to stay positive. The 10-yr has backed up a bit from yesterday’s lowest yield but at 1.58% today, it is still in better shape than it has been in a long time (2+months). Inflation fees are starting to subside a bit. Additionally, Japan had been a big net seller of Treasuries heading into the end of their fiscal year last month. That has now changed and they have become one of the big net buyers of treasuries for their new year. There is no real data next week so we will see where the market takes us. Matt Graham had some interesting thoughts to share as well.
- How much longer can these good times last? It’s the market! One can never be sure. Best case, summertime seasonals suggest a yield bottom in June/July/August. That’s happened in 6 out of the past 10 years with all but one of those examples representing corrections from big sell-offs that ended between December and April. Worst case, this could end up being like mid-2013 when it looked like yields had turned a friendly corner in July only to press to higher highs in Aug/Sept (but replace July/Aug/Sept with Apr/May/June). Bottom line, it could almost already be over, or it could last 2-4 more months if we assume past patterns will be repeated. If patterns aren’t repeated, we’re forced to retreat to the analytical hidey hole of “it depends” (on covid and the economy, in the current case).
- How much better could things get? We’ve already talked about how much worse things could get, with key levels like 1.95% and 2.4% representing the two most important overhead ceilings in the biggest and baddest of pictures. But how about the other side of the coin? In answering this question, we definitely have to lean more heavily on if/then scenarios. If much of the recent sell-off was anticipatory (and the paradoxical reaction to this week’s Retail Sales data does indeed make a case for that), then pre-covid all-time low yields in the 1.3% range wouldn’t be a crazy thing to discuss.
But since we’re starting the day almost 30bps higher than that, let’s focus on a few more immediate rally targets. After all, there’s still no guarantee we’ll see any of them. On the lowest end, 1.45% is the bottom of the “hitch” zone that we first discussed months ago. That’s still a relevant technical target. 1.50 and 1.525 are more immediate resistance levels.
- What should we watch out for? If you want to play this from a bullish/optimistic stance, keep an eye on the new downtrend (yellow lines). The rally got a bit ahead of itself yesterday but returned to the trend by the close. A retracement to the upper boundary would be tolerable as it would only be about 7bps of weakness from here.
As far as today is concerned, specifically, we may not be able to glean much. It’s more of a placeholder day in the grand scheme of things (based on the econ/event calendar). We’ll also need to take any big moves with a grain of salt as pre-weekend position squaring has given the wrong signal about the ongoing rally in each of the past 2 weeks.
The WSJ also had a few really interesting pieces. I am including one, as I see how long this update is becoming. It is in bold for a reason… please let me know when supply will meet demand and the market stabilizes…
The U.S. housing market is 3.8 million single-family homes short of what is needed to meet the country’s demand, according to a new analysis by mortgage-finance company Freddie Mac. The estimate represents a 52% rise in the nation’s home shortage compared with 2018, the first time Freddie Mac quantified the shortfall. The figures underscore the severity of the housing deficit, which is a major factor fueling the current red-hot housing market. The shortage is especially acute for entry-level homes, which makes it more expensive for first-time home buyers to enter the market, Nicole Friedman reports.
Please remain safe and healthy, enjoy the weekend, make today great!