Model Signal Alert

August 15, 2023

After a rather uneventful start to the week, markets moved up a gear on Tuesday, with bonds again trading sluggishly.

European bonds trade heavily after optically high UK wage growth (mostly due to higher NHS pay settlements). Alongside China, this has catalyzed a risk-off tone across the board, with equities heading lower and USD rallying again in the earlier hours. China’s PBoC cut the 1y MLF rate by 15bps to 2.50% and reduced the 7d repo rate by 10bps to 1.80%. Only one Economist was forecasting an MLF cut of 10bps, so that’s a surprise, although the weakening growth backdrop and rather soft data last week

Bond yields (DE/UK/US 10s below) are close to break-out levels. Remember that we have a pretty sizeable European bond supply coming up, as well as UK CPI tomorrow. For what it’s worth, my personal weekly food basket (same items, same shop) is down another 5% from last month’s levels. Not applying any hedonic adjustments, though I have noticed a fewer number of chicken thighs in the package.

US 30-year real yields are approaching 2%, which we last time saw in 2011. It remains to be seen that these relatively attractive real yields will meet demand from long-term holders and asset-liability hedgers.

Comparing the current treasury yield curve to history also puts things in perspective. Precisely 16 years ago, in 2007, the yield curve was notably steeper. Remember that the Fed cut the discount rate on August 17th, 2007, by 50 bps after the market already showed significant stress. The FOMC then cut rates by 50 bps a month later on September 18th. The pink line shows the curve as of today in 2007, while the green line is the current yield curve.

I have also plotted the yield curve as of Dec 31 2007 (yellow), which was when the Fed had already cut rates by 100 bps to 4.25%. Be mindful of how much is already been priced into the current curve.

Now, let’s look at what was flagged by the model as of yesterday’s close. We have 9 different charts shaping up. Let’s go.