3 Key Takeaways
Monitor this week’s Treasury auctions closely for signs of weak demand, which could push 10-year yields above 4.15% and reverse the recent downtrend.
Watch the dollar index for a move above 99, which would confirm a bullish double-bottom pattern and strengthen the outlook for the U.S. dollar.
Track widening credit spreads as long as stocks like BX, APO, and META for further deterioration.
It’s unlikely to be a very busy week from an economic data standpoint as long as the government remains shut down. However, that won’t stop the Treasury from issuing more debt through 3-year, 10-year, and 30-year Treasury auctions.
The 10-year Treasury rate has been trending lower since mid-July, but it’s now in a position to break out and start pushing higher again. At this point, to reverse the trend, all it would take would be a move above 4.15%. With rates having fallen significantly recently, this week’s Treasury auctions will provide insight into how eager investors are to purchase U.S. notes at these reduced yields. A weak Treasury auction could be all that’s needed to break the trendline.
The same holds true for the dollar index, which continues to show the momentum indicator on the RSI trending higher. While the dollar remains stuck around 97, there is a clear bullish divergence that has formed with the RSI, making the likelihood of a double bottom somewhat stronger. Still, the dollar index needs to rise above 99 to confirm this more bullish view of the dollar — a view that is not widely held.
Speaking of the dollar, the USDJPY could be weaker to start this week, now that the elections are over, and it would seem that the probable Japan PM Sanae Takaichi is viewed more as a fiscal dove, and is a protege of former PM Shinzo Abe. This could be one reason why narrowing spreads in Japan against US Treasuries have not strengthened the USDJPY. We will have to see how the market responds, but my initial thought is that we will likely see a weaker yen and higher Japanese rates.
Speaking of spreads, we’ve started to see Italian and German spreads begin to widen slightly. This spread has been historically tight and could be partly to blame for tight spreads globally. If this spread continues to widen, I would expect global spreads to follow suit.
Italian rates have been one of the few in Europe that haven’t risen. French and German rates have been trending higher lately, while Italian 10-year yields have been moving mostly sideways. It’s possible that Italian rates could start rising again soon, as one could certainly argue there’s a potential inverse head and shoulders pattern forming.
Additionally, in recent days, even in the U.S., we’ve seen the ICE BofA High Yield Option-Adjusted Spread begin to rise as well. If the U.S. labor market is truly weakening, one would expect credit spreads to widen.
We care about things like credit spreads because stocks are highly sensitive to changes in spreads. Even the recent widening in spreads hasn’t yet been reflected in stock prices.
It’s quite possible that the reason we’ve seen stocks like Blackstone…
…and Apollo’s stock fall is because the smarter parts of the market are starting to price in a deterioration in credit.
This could mean that all the AI spending may come back to bite at some point, and those who spend the most could suffer as a result. Meta.
We will just have to wait and see...
-Mike
Glossary by ChatGPT
Credit Spreads – The difference in yield between corporate bonds and comparable-maturity government bonds, indicating perceived credit risk.
Double Bottom – A bullish technical pattern that suggests a potential reversal after two price lows at a similar level.
Fiscal Dove – A policymaker favoring increased government spending or lower taxes to support economic growth, even at the cost of higher deficits.
Inverse Head and Shoulders Pattern – A bullish reversal chart formation signaling a potential change from a downtrend to an uptrend.
Option-Adjusted Spread (OAS) – The yield spread between a bond with embedded options and a risk-free benchmark, adjusted for the bond’s optionality.
RSI (Relative Strength Index) – A momentum indicator that measures the speed and change of price movements to identify overbought or oversold conditions.
Sovereign Spread – The yield difference between two countries’ government bonds, often reflecting relative credit risk or economic outlooks.
Treasury Auction – The process by which the U.S. government issues new debt securities to investors, influencing bond yields and market liquidity.
Yield – The return an investor earns on a bond, typically expressed as an annual percentage of its face value.
Disclosure
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