As Investors Ready for Jackson Hole, Real Yields Move to Lofty Levels
As Investors Ready for Jackson Hole, Real Yields Move to Lofty Levels
- There’s a bit of a risk-on rally to start the week as European equities are in the green and our futures are pointing to a higher open as well. Nothing too fundamental is driving the risk-on moves so we’ll see if it has the legs to stand through the trading session. That risk-on move, and a WSJ article over the weekend (more on that below), has Treasuries on the defensive and that may be the trend for the week with Powell’s Jackson Hole speech due on Friday morning (10am ET). Presently, the 10yr is yielding 4.31% down 15/32nds in price and the 2r is yielding 4.98%, down 2/32nds.
- A weekend article in the WSJ from Fed Whisperer Nick Timiraos talked about the r-star debate, and more broadly that the era of historically low rates may be over. Recall, r-star is the policy rate that is considered neutral or neither contractionary nor stimulative. It’s a bit of nebulous concept as it can’t really be identified with precision, but the Fed has estimated it at 2.50% for years. If structural shifts have occurred in the global economy (as the title of the symposium implies) that have permanently increased costs, it seems that the 2.50% r-star rate may need some adjusting as well.
- We don’t expect Powell to declare a new r-star rate on Friday but may admit that discussions exploring the rate are being had. Not wanting to move the goal posts during the game, Powell will likely stress that getting inflation to 2% remains the goal for this policy round but once this tightening phase is done and dusted, however, a new regime of r-star and inflation targets may be in the offing.
- Away from the high-brow discussion of r-star, we expect Powell will continue to keep the messaging in line with recent communications as it pertains to remaining rate hikes and higher-for-longer. While a skip at the September FOMC meeting looks more than likely, we expect Powell will still push the data dependency line as it pertains to any additional hikes before year-end. There’s no reason to retreat from that line just yet what with Treasury yields continuing to move higher, especially real rates (see graph below), and with equities struggling it all adds up to tighter financial conditions which is what the Fed is after.
- Apart from the Fed and Jackson Hole, this week will be dominated by housing data with July existing home due tomorrow with 4.15 million sales expected (annualized) which has been the run rate of late. New home sales for July are due on Wednesday with 704 thousand annualized sales expected which like existing sales has been the recent level of activity. July durable goods orders on Thursday are expected to be soft compared to June but nothing too dramatic.
!0Year Real Yield Moves to Fourteen-Year High
Agency Indications — FNMA / FHLMC Callable Rates
| Maturity (yrs) | 2 Year | 3 Year | 4 Year | 5 Year | 10 Year | 15 Year |
| 0.25 | 5.80 | 5.56 | 5.52 | 5.53 | 5.66 | 6.12 |
| 0.50 | 5.79 | 5.54 | 5.46 | 5.42 | 5.52 | 6.01 |
| 1.00 | 5.78 | 5.51 | 5.43 | 5.37 | 5.43 | 5.88 |
| 2.00 | – | 5.49 | 5.37 | 5.29 | 5.31 | NA |
| 3.00 | – | – | – | 5.25 | 5.25 | NA |
| 4.00 | – | – | – | – | 5.20 | NA |
| 5.00 | – | – | – | – | 5.16 | NA |
| 10.00 | – | – | – | – | – | NA |
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