Treasury Yields On A Tear

WHERE WE STAND – As expected, a relatively quiet and choppy start to the week yesterday, with the docket lacking major data catalysts, and news flow also relatively light.

That said, the Treasury market did experience notable selling pressure, with the belly underperforming throughout the session, while benchmark 10-year yields rose north of 4.15%, to fresh highs since late-July.

It’s tough to point to any specific catalyst as having triggered the move, particularly with yesterday’s Fed speakers saying nothing of pertinence, and with the investment grade issuance slate having been barren. Perhaps, at the margin, supply pressure from the European government bond space, and/or hedging ahead of a likely heavy issuance slate later in the week, were behind the move, though I feel as if both may be ‘scraping the barrel’ a little to pin a narrative on the price action.

Whatever the reason, the sell-off in Treasuries, and subsequent bear steepening of the curve, did help to put a bid into the dollar. The greenback reversed most of the losses seen on Friday, with the DXY reclaiming the 104 figure for the first time since mid-summer, in what was relatively broad-based strength against most G10 peers.

While some are seeking to pin both the move in the buck, and the move higher in Treasury yields, on a resurgence of the so-called ‘Trump trade’, I view that thesis with a degree of scepticism. I’d argue, instead, that the market is again pricing a theme of ‘US exceptionalism’, with little regard for who the victor of the 5^th November presidential election will be. This is particularly the case considering that swing state polls are still well within the margin of error, making it difficult to possess a high degree of conviction in a particular result.

One must also consider that, fundamentally, there are relatively few differences between the two candidates. The most significant such difference centres on regulation (Trump = de-regulation, Harris = stronger regulation, pending the makeup of Congress), with views on both fiscal and monetary policy seemingly closely aligned. As a result, particularly in the FX and FI arenas, it’s tough to imagine a prolonged change in the outlook whoever wins the White House, with ‘US outperformance’ set to remain the running theme for some time to come.

Elsewhere, yesterday, it was a relatively choppy, although ultimately soft, day in the equity complex, with downside led by the tech sector, as the Nasdaq notably underperformed. While I remain bullish over the medium-term, amid strong earnings and economic growth, coupled with the forceful Fed ‘put’ backstopping sentiment, I wouldn’t be at all surprised to see participants continue to take some risk off the table throughout the week, ahead of not only the presidential election, but also the next jobs report (1^st Nov), and FOMC decision (7^th Nov).

Gold, meanwhile, traded to a fresh record high, extending gains north of $2,700/oz. The rally remains a headscratcher, with traditional drivers of the yellow metal continuing to point in the opposite direction, though present bullish momentum is fierce enough that I’d not be tempted to fade the move just yet.

Lastly, WTI crude ticked north of $70bbl once more, as participants continued to closely monitor geopolitical tensions in the Middle East, awaiting an Israeli response to the recent Iranian missile barrage, which many believe could well be imminent.

LOOK AHEAD – Another quiet data docket lies ahead today.

In fact, there is only one economic release of note, in the form of October’s manufacturing survey from the Richmond Fed. While the index tends to help shape expectations for the more widely-watched ISM survey next week, the figures on their own tend not to be a major market mover.

That said, the central bank speaking calendar is a busy one, as the annual IMF-World Bank meetings kick-off in Washington DC. Unsurprisingly, this will likely result in a lot of ‘noise’, and very little ‘signal’, though appearances from BoE Governor Bailey and ECB President Lagarde might be worth watching regardless, on the off-chance that either says anything interesting.

The cadence of earnings releases also ramps up today, with a busy pre-market reporting slate, including defence giants Lockheed Martin and RTX, plus classic bellwether stock 3M. Participants, naturally, will be looking for the solid earnings performance seen thus far during reporting season to continue, as the S&P remains set for its fifth straight quarter of YoY earnings growth.