Macro Updates 06/05/2024 Trading Markets

The very last post from previously, before I carry on another one

https://medium.com/@kiann00/macro-updates-29-04-2024-trading-markets-7240cd6f40ba

1. Markets (Current Week, and maybe past week moves)
2. Key Events of the past week
3. Key Events of the coming week
4. Any trading strategy/thoughts

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1. Markets (Current Week, and maybe past week moves)

pre-writing the (Monday) weekly macro thoughts, because (in the US Fixed Income markets), two important events happend (with the last piece on 3rd May).

In a nutshell, the US treasury curve volatility in the (next 3mth to 6mth) near-term has been resolved. Taking a step back, … (in the author’s view) the TWO MOST important metrics for the long-maturity (above 10y) US treasury are

• the Fed bond-buying programme (QT, quantitative tightening and the subsequent QE, quantitative easing); which we state as the US bond ‘demand’.
• the Treasury issuance (to fund the US government fiscal policies); which we state as the US bond ‘supply’.

So, as any one who knows the basics of economics and supply/demand, this pretty much determines the ‘price’ (or yield) of the US treasuries.

• On the ‘demand’ side, from the 1st May 2024 FOMC, where markets had been pricing NO rate-cuts, it was inline by Chairman Powell. It was the presser (press conference) where the action was.
  Fundamentally, the Fed set the bar for rate-hikes (at least in the near term) to be very high, such that the markets ruled out hikes : I think it’s unlikely that the next policy rate move will be a hike. To hike we’d need to see evidence policy is not sufficiently restrictive — that’s not what we see.

The 2-year yield rallied -7bp to 4.95%, on the back of this.

The long-maturity (> 10y) was where the impact was more important.

• Fed speech : Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities
  Translation : the QT monthly run-off went down by -$35bn; instead of the expected smaller -$30bn; to $25bn (i.e. market constriction in demand is -$25bn instead of -$30bn per month; and hence ‘larger demand’.)
  The long-end (10y), chart below, rallied almost -10bp to 4.6%.

• To the ‘supply’ side, first it means there is $105bn ($35bn * 3, over the next quarter) the Treasury can issue to keep the ‘supply’ in the market stable. Before the FOMC, in the QRA (quarterly refunding announcement) on 1st May, Yellen had already noted that the Q2 issuance would be $240bn (on the upper range of market forecast), with $850bn for Q3 (also on the upper range of market forecast); such that TGA (the current account of the US govt) ends up being $750bn in July-end, and $850bn in Sept-end (https://home.treasury.gov/news/press-releases/jy2304).
  While the QRA came in at the upper end (on 1st May), yields actually rallied as there was the tail-risk of unexpected outsized issuance.

Putting both together,… so while the US total treasury issuance is STILL INCREASING (with the US debt rising by a crazy $1-trillion every quarter), the path forward (over the next 3mth to 6mth, hitting the US 6th November US elections) has been clarified where there will be no crazy supply/demand imbalance. Monetary policy has also been accelerated to eventually take over from fiscal policy.

This is bullish for US bonds (especially the long-maturity), and in particular taking the next 3-year view, as we are on track for eventual stop of QT, and perhaps even QE. Given the market reaction of moving to 4.6%, one can propose that the forward range of US 10y yield can range between 4.6% (or safer at 4.7%) to 5.1%, which represent good entry points to US 10y treasury. This is the proposed 3-sigma probability move, by the author for tactical US treasury trades.
What is left is now, the 3rd May details, by Yellen, on the proposed make-up of the issuance. Market is thinking that T-bills (<1yr) will still make up the largest component.

With that, we close this early note; as it was important for the US interest-rate market. Look forward to seeing everyone next Monday!