10-year Treasury dips to monthly low despite strong macro fundamentals
- April 19, 2021
Corporates | Kennett Square, PA
This week, further downward moves in long-term rates belied strong macroeconomic data prints in retail sales and unemployment. The roughly 8bp drop in the 10-year yield illuminates a challenge for corporate borrowers exposed to idiosyncratic market movements.
Following four consecutive months of upward momentum, long-term rates represented by the 10-year treasury yield fell over the past week, down approximately 15 basis points since the beginning of the month. The move comes amid strong data prints in unemployment and retail sales, and is likely explained by the Johnson & Johnson vaccine pause, along with hedge fund repositioning. The move down is further contradicted by equities hitting record highs and oil surging upward as well, rendering a challenging landscape for borrowers and hedgers alike.
Treasuries fall despite auspicious economic data
A week that saw equity markets hit record highs, combined with reduced unemployment and strong retail sales, would typically trigger concurrent increases in long-term rates, consistent with economic growth expectations. Curiously, the reverse happened over the past week. Initial jobless claims came in at 576,000 Americans filing for first-time unemployment, the lowest weekly figure since the onset of the pandemic and beating economist expectations by over 100,000. Retail sales data released for March revealed a 9.8% month-over-month increase, the strongest such figure since May 2020, when Congress passed the first round of stimulus. Indeed, stimulus checks likely played a similar role this time around; as shown in the chart below, stimulus checks boosted the January figure as well, which absent the stimulus months has not been a stellar data series.
Rather than being buoyed by the positive economic signals, long-term dollar rates fell during the week, with the 10-year reaching a 30-day low of 1.576% on April 15. The initial move downward was likely a response to the pause in distribution of the Johnson & Johnson vaccine, thus weighing on short-term growth prospects. However, the series moved further south at the same time as the strong retail sales and unemployment data releases; this unlikely move was ostensibly related to hedge funds reversing short positions they had entered into at the beginning of the year. The roughly 10 basis point intraday decline in the 10-year highlights a rate risk challenge for borrowers tracking macroeconomic fundamentals; such idiosyncratic factors could just as easily move rates in the opposite direction, illuminating the import of principles-based hedging strategies in this market.
(Related insight: Read "Managing interest rate risk on future debt issuances.")
Fed Chair Powell reiterates patient stance
Markets continue to be on alert for potential inflation and a timeline for eventual Fed rate hikes. On the inflation front, CPI data released last week showed an attention-grabbing 2.6% year-over-year figure, but it was discounted by markets looking past the transitory energy-related impact on CPI. Rather, core CPI—which strips out energy and food prices—remained subdued at 1.6%. The Fed, meanwhile, reiterated its guidance-driven approach on rate hikes. Regarding potential asset tapering, Chair Powell noted the Fed would likely taper long-term asset purchases before raising short-term interest rates. Currently, the Fed purchases long-term securities in order to put downward pressure on longer-term rates to support borrowing.
Oil prices move upward on OPEC announcement
After falling in mid-March, crude oil jumped last week after OPEC raised its 2021 oil demand growth forecast, projecting that demand will rise by 5.95 million barrels per day in 2021. That projection represents an increase of 70,000 barrels per day from last month's forecast, driving crude up $2/barrel to roughly $66.50/barrel. An upward revision in OPEC's forecast reverses the trend of the past few months, which came in the face of increasing COVID-19 cases, especially in Europe. Signaling further demand increases, U.S. crude inventories fell by 5.8 million barrels last week, the largest decline in two months.
(Related insight: Read "Using commodity collars to manage market volatility.")
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0111
Our featured insights
Persistent inflation weighs on the market as energy prices continue to rise
Treasury yields lost recent gains last week despite continuing inflation as consumer prices rose 5.4% year-over-year. Energy prices continue to rise amidst high demand and supply constraints.
Non-core inflation strikes again
Despite many central banks’ transitory inflation perspectives, inflation returned this week as commodity and food prices continued to rise. The five-year breakeven inflation rate, a broad measure of the market’s long-term inflation expectation, hit its highest reading since May after rising 13...
Yields climb on Fed tapering bets
FOMC aftermath and fiscal policy wrangling combined to drive 10-year yields to their highest levels in three months, peaking at 1.55% this week, impacting borrowers and hedgers alike. Meanwhile, price pressures in the energy sector continued their upward march.
Treasury yields climb as Fed holds rates steady
The Fed holds short-term rates steady but indicates at least one rate hike in 2022 as U.S. economic recovery continues.
Inflation plateaus as commodities continue upward climb
August CPI data showed inflation declining slightly from its June 2021 peak, while in energy markets recent supply shocks continue to drive prices higher. Interest rates remain range bound as next week’s FOMC meeting approaches.
FX and commodities volatility continue despite continued reopenings
As global economies struggle with natural disasters and the surging COVID-19 delta variant, economic indicators are painting mixed stories about recovery. U.S. initial jobless claims hit a pandemic low, while the dollar’s strengthening trend may be wavering in response to a more bullish stance...
August nonfarm payrolls highlight week of mixed data
As the market continued to react to Federal Reserve Chair Powell’s remarks at the Jackson Hole Economic Symposium, August nonfarm payrolls grabbed headlines after falling short of expectations. Elsewhere, data came in mixed as the delta variant continues to weigh on increased demand.
4 questions to ask when evaluating treasury technology platforms
Treasury teams increasingly rely on technology platforms to automate routine tasks, improve accuracy, and inform strategic decisions surrounding working capital, liquidity, and financial risk management. With an ever-growing ecosystem of technology platforms available to treasury and accounting...