Fears of Renewed Chinese Lockdowns Have Treasury Prices Higher

  • Treasury yields and stock futures are lower this morning as a few Covid-related deaths in China renewed concerns that the Chinese government may resort to another round of lockdowns that would dim global growth and create more supply chain woes. The 10yr is yielding 3.77% up 15/32nds in price while the 2yr is currently yielding 4.50%, up 2/32nds.  The outperformance by the long-end has the 2yr -10yr inversion at a new cycle low of -73bps.

 

  • As mentioned above, China saw its first Covid-related death in almost six months on Saturday and another two were reported on Sunday. Worsening outbreaks across the country are causing concern that the government will resort to harsh lockdowns with all that that implies for growth and supply-chains reliant on Chinese products. A city near Beijing that was a test case for reopening has suspended schools, locked down universities, and asked residents to stay home for five days. The global financial markets await a response from the Chinese government.

 

  • With Thanksgiving on Thursday, the trading week is effectively limited to the first three days and even those days will see limited trading volumes. It also has the Treasury auctioning in an abbreviated fashion with $42 billion in 2yr notes and $43 billion in 5yr notes selling today. The typical market action is to build a concession into prices leading up to the auctions, but for now the Chinese news has lent more of a bid to Treasuries.

 

  • The data calendar is also limited to the first three days of the week with most of the reports decidedly second tier in nature. The headline release will likely be the FOMC minutes from the November 2 meeting at 2pm ET on Wednesday.  Traders will be looking for any mention of terminal rate expectations and the degree to which any potential slowing in the pace of hikes is discussed. Recall the statement was greeted somewhat positively by the market but those good feelings of a potential policy pivot were quickly squashed by Powell in the press conference. It will be interesting to see if the minutes strike more of the Powell press conference tone or more of the statement tone.

 

  • The other notable release will be October Durable Goods Orders which will also be released on Wednesday. The report is expected to show a modestly better level of orders and shipments from September which was a clear disappointment. The fact that a modest rebound is expected, however, implies that the goods market isn’t falling off a cliff and remains somewhat resistant to slowing despite the 375bps in rate hikes to date.

 


 

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 5.39 5.17 5.11 5.10 5.16 5.62
0.50 5.33 5.14 5.05 4.99 5.02 5.51
1.00 5.33 5.11 5.01 4.94 4.93 5.38
2.00 5.10 4.96 4.86 4.81 NA
3.00 4.82 4.75 NA
4.00 4.70 NA
5.00 4.66 NA
10.00 NA

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Published: 11/21/22 Author: Thomas R. Fitzgerald