10-year T-note yield posts 9-month high as yield curve steepens
Markets turn towards watching corporate cash repatriation and after-tax earnings following passage of the tax bill
U.S. government shutdown on Friday appears unlikely as focus shifts to clean CR
Unemployment claims remain favorable
U.S. Q3 GDP expected unrevised at +3.3%
U.S. home prices expected to march higher
Nov LEI expected to extend gains
5-year TIPS auction
10-year T-note yield posts 9-month high as yield curve steepens — The 10-year T-note yield on Wednesday extended Tuesday’s sharp upmove and posted a new 9-1/4 month high of 2.501%, taking out the previous high posted in October. The 10-year yield since last Friday has risen sharply by +14.4 bp to 2.497%.
The 10-year T-yield has surged this week due to (1) passage of the tax bill, which has boosted expectations for both inflation and Fed tightening in 2018, (2) heavy technical selling with Dec 10-year T-note futures prices breaking down to a 9-1/4 month low on the nearest futures chart, and (3) a year-end squeeze on curve-flattener trades that were very popular this year.
Regarding inflation expectations, the 10-year breakeven inflation expectations rate on Wednesday rose to a 7-3/4 month high of 1.947% and closed the day little changed at 1.931%. Regarding Fed policy, the market this week has boosted expectations for Fed tightening in 2018 to 49 bp from 47 bp last Friday.
Regarding the yield curve, the spread between 10-year and 2-year T-note yields this week rose to a 1-month high of 0.639%, up by +12.2 bp from last Friday’s 10-year low of 0.517%. This week’s steepening in the yield curve has put the kibosh for the time being on last week’s spate of commentary that the yield curve might invert in 2018.
This week’s surge in U.S. T-note yields has put upward pressure on overseas bond yields as well. The 10-year German bund yield is up this week by +10.4 bp at 0.405% while the 10-year UK gilt yield is up +10.0 bp at 1.250%. Asian yields have risen by much smaller amounts. The Chinese 10-year yield is up +1.8 bp at 3.912% while the 10-year JGB is up +1.4 bp at 0.060%.
Markets turn towards watching corporate cash repatriation and after-tax earnings following passage of the tax bill — The Senate on Tuesday night, and the House on Wednesday, approved the tax reform bill, sending it to President Trump for his signature. President Trump may not actually sign the bill until Jan 3 so that the PAYGO automatic spending cuts to Medicare and other programs will not take effect this year. The stock market will now turn towards assessing the extent to which after-tax earnings will rise for particular companies in 2018 due to the tax cuts. The markets are also waiting to see how much overseas corporate cash is repatriated and how much of that cash is (1) distributed to investors via stock buybacks and higher dividends, (2) used to pay down debt, or (3) used for capital investment or M&A.
U.S. government shutdown on Friday appears unlikely as focus shifts to clean CR — With only two days left until a government shutdown, Congressional leaders seem to be gravitating to passing a clean continuing resolution that will last until Jan 19, thus deferring a crunch on a whole range of contentious issues. House Speaker Ryan couldn’t even get his own Republican caucus to agree on a single bill, let alone a bill that could get past a Democratic filibuster in the Senate. Congressional leaders therefore seem ready to punt until Jan 19. The markets continue to express no real concern about a government shutdown this Friday at midnight when the current CR expires.
Unemployment claims remain favorable — The market consensus is for today’s weekly initial unemployment claims report to show a +8,000 gain to 233,000 (after last week’s -11,000 to 225,000) and continuing claims to show a +12,000 gain to 1.898 million (after last week’s -27,000 to 1.886 million). The claims data is in good shape and indicates that U.S. businesses are holding on tightly to their current employees. Initial claims are only +2,000 above October’s 45-year low of 223,000 and continuing claims are only +18,000 above November’s 44-year low of 1.868 million.
U.S. Q3 GDP expected unrevised at +3.3% — The market consensus is for today’s Q3 GDP report to be unrevised at +3.3%. U.S. GDP has been very strong in the past two quarters at +3.1% in Q2 and +3.3% in Q3. The consensus is for another strong GDP report of +2.7% in Q4. The consensus is for GDP to have a strong showing of about +2.6% in 2018, which is much better than the Fed’s estimate of +1.8% for U.S. GDP potential. The Fed is forecasting that GDP will be strong at +2.5% in 2018 but will then slip to more normal levels near +2.0-2.1% in 2019-2020.
U.S. home prices expected to march higher — The consensus is for today’s Oct FHFA house price index to show a +0.4% m/m increase, which would mark 5-1/2 straight years without a monthly decline in the index. U.S. home prices continue to move higher on strong demand and tight supplies. The series in Sep was up sharply by +6.3% y/y and by a total of +41% from the housing bust low posted in 2011.
Nov LEI expected to extend gains — The market consensus is for today’s Nov leading indicators to show an increase of +0.4%, adding to October’s +1.2% surge. The LEI is in strong shape considering that Oct’s year-on-year rise of +5.2% was the strongest report in 2-1/2 years.
5-year TIPS auction — The Treasury today will sell $14 billion of 5-year TIPS. Today’s auction will be the second and final reopening of the 1/8% 5-year TIPS of April 2022 that the Treasury first sold in April. The 12-auction averages are: 2.48 bid cover, $38 million in non-competitive bids, 5.6 bp tail to the median yield, 13.6 bp tail to the low yield, 13% taken at the high yield, and 63.8% taken by indirect bidders (mildly higher than the coupon average of 62.6%).