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(Bloomberg) — TIPS breakevens expanded this past week despite a sharp sell-off in energy, while wage-growth data has kept a bid for breakevens by investors looking past gasoline deflation over the next month or two.

  • The curve flattened a great deal: nearly 5bps from five-year to thirty-year. The yield between 5yr and 10yr is getting close to flat, and may actually get there with further energy pressure.
  • Real Yield    Real Yield   Change       Carry         Change Adjusted for Carry
  •  5yr              1.12%             0.086%       0.000%       0.086%
  • 10yr             1.15%             0.079%      0.000%        0.079%
  • 30yr              1.33%           0.040%       0.000%        0.040%


  • Breakevens widened across the curve, with the longer dates outperforming. Energy selling off almost 7% over the past week wasn’t enough to turn the 5yr breakeven negative, but was enough to have it lag on the curve.
  • BEI     BEI     Change Carry Change Adjusted for Carry
  • 5yr     1.93% 0.013% -0.003% 0.010%
  • 10yr 2.07% 0.017% -0.002% 0.016%
  • 30yr 2.12% 0.033% -0.001% 0.032%


  • The 1y1y real yield continues to march higher, adding another 4.2 bps this week.
  •                             Today      Last   Week       Change
  • 1y1y Nominal   3.295%    3.217%              0.078%
  • 1y1y Inflation    2.220%    2.183%             0.037%
  • 1y1y Real            1.076%    1.034%            0.042%
  • 10yr inflation swaps outperformed cash; otherwise, the basis was pretty quiet.
  • Basis
  •           Basis    Chg
  • 5yr  0.270%  0.005%
  • 10yr 0.210% 0.029%
  • 30yr  0.234% -0.001%


  • NOTE: Jacob Bourne is an FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.


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Don’t Blame Fed Policy for the Market Correction: Macro Man
(Bloomberg) — In a few days, the sound and the fury surrounding the midterm elections will be behind us and markets can get on with their lives. While it’s certainly possible that a shocking result could shift the market narrative for more than 48 hours, the base case is surely tilted toward a renewed focus on the favored themes of trade tensions and Fed tightening. Last month’s growth scare and a few presidential tweets have sharpened the focus on the interest rate cycle, raising concerns that the Fed may be on the brink of a policy error. The reality is that the Fed is simply “taking back control” of its policy settings; while that may have been a driver behind last month’s P/E de-rating, it’s likely that there are other factors at work as well.

The notion that “everything matters” is as false as the idea that “nothing matters,” but for financial markets the truth probably rounds toward the latter. As such, the theory that the composition of Congress over the next couple of years will probably exert a minimal marginal influence on asset market returns has some appeal.

That puts the focus back on familiar topics like trade tensions and the Fed, where there appears to be a growing drumbeat of support for the notion that the Fed is on the brink of over-egging the tightening cycle. It feels like many of the proponents of this theory have forgotten that there’s no divine right to 15% annualized returns with minimal drawdowns, the last seven years notwithstanding.

It’s stating the obvious, but the Fed controls its monetary stance by adjusting the level of nominal interest rates. How accommodative monetary policy is depends not only on the funds rate but also on the level of inflation and the neutral interest rate.

It should come as little surprise that marginal changes in the policy rate tend to be reflected in changes in the Fed’s policy stance, at least since the early 1980s. Well, that was the case until the current decade, when a combination of the zero lower bound and Fed gradualism broke the historical link between changes in the nominal funds rate and changes in the Fed’s policy stance. That’s a big reason why the Fed has exerted so little control over financial conditions during this cycl.

It’s notable that despite 100 bps of nominal tightening over the past 12 months, according to this framework the Fed’s policy stance has only tightened by 35 bps thanks to rises in core inflation and the neutral interest rate. That doesn’t sound like much, and it isn’t.

Over the past 12 months the P/E ratio of the S&P 500 has fallen by 2.44 (the multiple using 1-year forward expected earnings has fallen by a similar but slightly smaller amount.) That’s a pretty substantial de-rating; it’s worse, in fact, than any observed in either of the previous two rate-hike cycles, both of which saw the Fed’s policy stance tighten by 200 bps over the course of a year.

Over time the relationship between Fed policy and the market multiple is decidedly non-linear. There tends to be a negative correlation during tightening cycles and non-recession easings, but a positive correlation during economic contractions and bear markets. Last year was a notable exception to this relationship, where the Fed’s policy stance rose the most over a twelve-month span since 2006, yet the market multiple increased. This year has represented the hangover from that stock-market party.

An obvious explanatory variable for these discrepancies is the White House, where the feel-good factor surrounding Donald Trump’s deregulation drive and tax cuts has (belatedly) been replaced by concerns over trade policy and the uncertainty that it’s engendering.

Obviously, there are a lot of moving parts here, and this framework probably underweights the impact of the overall Fed policy suite–particularly the forward guidance towards restrictive policy moving forwards. But that’s a separate issue that we’ve discussed elsewhere.

Ultimately it’s a good thing if the Fed is taking back control of changes in its policy stance. So, too, is a more realistic assumption of the future risk-adjusted return on the part of investors. You can blame the Fed if you want, but it doesn’t mean that you’re right. And it also doesn’t mean that the strike price of the Fed put for equity investors is visible with the naked eye.


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(Bloomberg) — U.S. stocks climbed with the Nasdaq outperforming as Apple, Amazon and Alphabet advanced; trading volume light with congressional elections in focus.

Treasuries rebounded from near session lows after 10-year note auction drew a yield 1.2bp lower than the WI level and produced a record indirect allotment.

The auction offset another poor showing by direct bidders; the two-year climbed to its highest since 2008. The dollar pared early session losses.

Emerging markets assets mostly unchanged with the Turkish lira the outlier, falling as much as 2% vs the dollar.

Elsewhere, oil headed for an eight-month low as concerns over continued supply mounted.

Key Headlines:

  • U.S. Treasury sold $27.0b in 10-year notes at a yield of 3.209%
  • Average price for whole milk powder falls to $2,655, according to GlobalDairyTrade
  • Turkey court convicts HDP lawmaker Togrul on terror: AA
  • U.S. job openings fell in September from a record in the previous month


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(Bloomberg) — Treasuries grind lower, flattening the curve, as yields ended close to cheapest levels of the day shortly after cash settlement and traders looked ahead to Tuesday evening’s midterm results. Futures volumes were below average again amid muted activity, while demand for downside protection on 10-year notes continued to ramp up.

  • Yields were higher by 1.3bp to 2bp out to the 10-year sector, while the long end was marginally richer on the day, flattening 5s30s by 2bp and 2s10s by 3bp; 10-year yields reached 3.22%, almost matching Monday’s high.
    • Large curve trade via 5-year and ultra-long bond futures triggered early flattening momentum, which then extended into the close with 5s30s reaching as low as 37.4bp.
  • Solid 10-year auction, which traded through the WI by 1.2bp, briefly halted the grind higher in yields; direct allotments were weak once again at just 1.2%; indirects were at record 73.8% high.
  • Treasury futures volumes were just 60% of 10- day avg up to 3pm ET, although options activity was more robust with demand seen for short-term hedges against a rise in 10-year yields.
    • Flows on the day included around 50k 117.25 TY Week 2 put options bought at 6, equivalent to around 3.32% in yield.
  • U.S. stocks climbed Tuesday as tech names outperformed, led by Apple, Amazon and Alphabet, which added to downside in Treasuries; trading volumes were light given focus ahead on looming congressional election results

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(Bloomberg) — Only one corporate new issue is pricing Tuesday amid the highly watched midterm elections.

  • Waste Connections is raising $500m of debt to use for general corporate purposes and acquisitions; the deal was upsized from an initial target of $400m.
    • The waste management company reported earnings last week, saying it’s on track to meet or exceed its full year forecast and also raised its quarterly dividend.
    • Fitch upgraded the issuer’s long-term issuer default rating one notch to BBB+ on Friday.
  • Volkswagen Group of America Finance is reaching out to fixed income investors today and tomorrow for a possible multi-tranche offering, while Whirlpool wrapped up investor calls last week.

ISSUANCE STATS Day $500m  WTD $2.000b   MTD $9.350b  YTD $991.109b


  • Waste Connections US Inc (WCN) Baa2/BBB+
    • $500m 10Y at +105; +110a (+/- 5), +125-130


  • Landwirtschaftliche Rentenbank (RENTEN)
    • $1.25b 5Y at MS+5; MS+5a, MS+6a
  • Suzano Austria GmbH (SUZANO) BBB-/BBB- (S&P/Fitch)
    • $500m Tap of 7% 2047 at 6.85%; 6.90%a (+/- 5), very low 7%s
  • Aeropuerto Internacional de Tocumen SA (AITOCU) BBB/BBB (S&P/Fitch)
    • $650m Tap of 6% 2048


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(Bloomberg) — Investor enthusiasm for soybean futures appears to be dimming with aggregate open interest declining to the lowest since February.

Soybean prices have fluctuated in recent sessions before U.S. elections on Tuesday and the government’s crop estimates on Nov. 8, while U.S.-China trade woes weigh on trading.

China is finding ways to go without U.S. soybeans, Archer-Daniels-Midland CEO Juan Luciano says Tuesday. U.S. exports continue to trail their usual pace amid China’s tariffs, and Brazil’s crop faces beneficial rain.


Early planting in Brazil’s Mato Grosso may lead to an earlier-than-usual harvest, allowing China to shun U.S. supplies, Luciano says on a conference call.

The company is confident in U.S. exports with other buyers stepping up for shipments as prices remain low.

On Monday, aggregate open interest at ~750,120 contracts was the lowest since Feb. 12 Chinese Vice President Wang Qishan said Beijing remained ready to discuss trade resolutions . He warned that China wouldn’t again be “bullied and oppressed by imperialist powers”.

U.S. inspected  1.2m tons for export in the week ended Nov. 1, down 51% y/y, USDA data showed Monday.


Soybean futures for January delivery fall 0.2% to $8.84 a bushel on the Chicago Board of Trade Aggregate trading for this time falls 44% below the 100-day average, according to data compiled by Bloomberg.

On Monday, the contract dropped 0.2%; 60-day volatility declines to the lowest in almost four months

Market talk

Traders are waiting for developments on the trade dispute,  Matt Ammermann , commodity risk manager at INTL FCStone in Plymouth, Minn., says in a telephone interview More may emerge after the U.S. elections and G-20 summit in Argentina Commerzbank forecast 4Q price average  at $8.75

Other markets 

Corn futures for December delivery fall as much as 0.5% to $3.72 a bushel 

Wheat futures for December delivery rise as much as 1.3% to $5.13 3/4 a bushel


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-R.W.N II, yours in 322.

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