Wednesday, August 12, 2020

"A $1 Trillion Glut of Bonds Is Dwarfing Central-Bank Demand"

This is old news (July 21) but I want to hammer home the point we've been making for a while now:
June 22
Wolf Richter: " I, Who Hates Shorting, Just Shorted the Entire Stock Market. Here’s Why"
....Either way though, he also gifted us with this lovely little Easter Egg:
Fed Ends QE, Total Assets Drop. Liquidity Injection Ends
by Wolf Richter • Jun 18, 2020 
That reduction in support for risk assets will take a while to play out, maybe August which would set up first a bond and then an equity decline going into September - October.
Something that some very big money wishes to see happen. 

As noted in the introduction to July 30's "Tech stocks set to lead market higher Friday after the big four post blowout earnings, QQQ gains 1%":

The thing to keep an eye on are rates, not equities.
Sometime in August we expect Treasury issuance to exceed Fed buying causing a backup in rates.
Current ten year: 0.5410% -0.0380% .
Since the Fed can buy any amount they want, up to and including all issuance (and even all outstanding!), the mismatch will by definition have to be a deliberate decision, although it won't be communicated as such.
Right now equities are a distraction that will trade higher for a few weeks....
August 6
"Treasury Announces Record $112BN Quarterly Debt Sale, Unveils Tsunami Of New Bond Issuance"

And from Bloomberg, July 21:
As fast and furiously as the world’s central banks are purchasing debt, there’s still about $1 trillion of sovereign bonds coming to market in the months ahead that will be looking for buyers.

The flood of fresh debt, sold by governments to fund pandemic-rescue packages, threatens to dwarf central-bank buying and swamp markets in the U.K., Canada and Australia, according to Bloomberg calculations. Policy-maker purchases will also lag issuance in the U.S. and Japan, where a continuing tilt toward buying short-maturity debt would risk allowing yields on longer-dated bonds to rise unchecked, hurting pension funds and life insurers that rely on these markets.
By contrast, most of Europe is set to benefit from the European Central Bank’s purchases and may offer the best shelter for investors worried about a potential surge in bond yields.
The debt deluge comes after a flurry of interest-rate cuts and expanded asset-purchase plans by central banks left investment playbooks in shreds. Of course, investors buy debt worth hundreds of billions of dollars every year. But in an era where some assume central banks’ support is all encompassing, the trillion-dollar gap between supply and policy-maker demand highlights just how important conventional investors still are for governments looking to fund record stimulus.
With a net surplus of $980 billion in expected issuance beyond central-bank purchases, here’s a look at the supply and demand dynamics in the world’s major markets in the second half of the year.
Treasury Tussle
The Treasuries market alone could see more than $1 trillion in net bond supply in the six months through Dec. 31, and strategists are predicting sales will comprise fewer bills and more longer-dated notes.
So far, domestic buyers have supported U.S. debt. But some of the market’s most loyal investors appear to be stepping away just when they’re needed most. Pension funds typically buy Treasuries to match their long-term liabilities, yet a proxy for their purchases of longer-maturity bonds -- holdings of so-called stripped Treasuries -- has fallen consistently since February.
With this in mind, positioning for a steeper yield curve -- when longer-maturity bond yields rise faster than their shorter-dated counterparts -- has become a popular trade.
Still, the latest 30-year bond auction was rock solid with a group of buyers that included foreign central banks bidding via the Federal Reserve Bank of New York taking 72%, a record.
JPMorgan Chase & Co.’s Jay Barry projects a 35% increase in Treasuries supply over the second half, “along with a moderate demand gap,” and recommends investors consider steepener bets that benefit with the gap between yields on five- and 30-year bonds widen.
However, others on Wall Street warn that the curve is more likely to flatten, with longer-dated bond yields falling, given that the Federal Reserve could increase the pace of its Treasury purchases as early as this month, or even extend the duration of its purchases.
“The Fed’s main commitment is, was and will always be to the Treasury market,” said Mark Spindel, chief investment officer at Potomac River Capital. “The long end of the Treasury market has looked attractive and should remain so for a while.”
Buoyant Europe
It’s a different story in Europe. Government bond sales in the euro area look set to fall short of the European Central Bank’s purchase plans and investor redemptions by 222 billion euros ($251 billion) from June 30 through year-end, according to Bank of America strategist Erjon Satko.
That’s a positive backdrop for European bond markets and should allow for some outperformance versus peers, he wrote in a recent note.
But Germany is bucking the positive trend, with 150 billion euros of supply due in the second half, more than any of its regional peers, according to Jorge Garayo, a rates strategist at Societe Generale SA. The bulk of sales is expected in maturities beyond seven years, which could push up yields on longer-maturity debt, he said....

After bottoming at  0.5040% on August 6th the 10-year's yield—proxied by the CBOE's TNX—has backed up to 0.675%, after trading at 0.69% earlier today:

All that being said today may be setting up an "Evening Doji" reversal, tomorrow's action will tell us more.