Surging Crypto, Swap-Spreads, Bonds, & Stocks Signal "Something's Afoot"
Ugly US housing and sentiment data were just the (bad news) spark to set stonks on fire today. Small Caps led the way, up around 3%, followed by a huge surge over 2% in the Nasdaq (ahead of this week's epic earnings extravaganza). The Dow was the biggest loser of today's winners, eking out a 1% gain...
...on the back of a massive short-squeeze (biggest daily gain for the 'most shorted' basket since May). Off of yesterday's lows, 'most shorted' stocks are up a shocking 11%...
Source: Bloomberg
...with no fear of downside evident in the options market...
Source: Bloomberg
...but there was lots of chatter that something scary this way comes in the arcane details of the rates market as swap spreads notably decoupled from treasury yields today suggesting, as one veteran swaps trader remarked via text "something is afoot".
The 10Y swap spread (red) is negative (means 10y swap rate is below 10Y treasury yield) and broke away from TSY yields today...
Source: Bloomberg
This decoupling is likely being driven by chatter about Treasury buybacks (as we explained in detail here), which is an effective pivot by The Fed and is implicitly backstopping Treasuries - hence TSY yields fall closer to swap rates. Belly swap spreads widened even more today than the long-end...
Source: Bloomberg
Widening swap spreads (less negative in this case) have traditionally signaled increased systemic risk (including liquidity anxiety). Simply put, a higher spread suggests market participants are willing to swap their risk exposures, suggesting overall risk aversion, although we would note that, as the same veteran trader noted, "a lot of these moves have been technically-driven" referencing the SOFR/LIBOR transition. Still, it's a sudden and noteworthy shift.
Is that 'anxiety' why we saw cryptos explode higher today also? (we note some chatter on Chinese capital outflows after Xi's 3rd term). Bitcoin ripped up to $20,400...
Source: Bloomberg
...and Ethereum soared back above $1500...
Source: Bloomberg
Gold was also bid on the chatter about a Fed shift...
US Treasuries were aggressively bid today with the mid- to long-end of the curve dramatically outperforming (2Y -3bps, 10Y -15bps). Notably, TSYs were well bid overnight then yields plunged on the shitty US data. The bid ended when Europe closed. This left 2Y yields unchanged on the week while 10Y yields are down around 13bps (a significant flattening)...
Source: Bloomberg
At the short-end, Fed rate expectations shifted dovishly today...
Source: Bloomberg
The market remains sure that The Fed will be cutting rates next year...
Source: Bloomberg
The dollar tumbled to 3 week lows today...
Source: Bloomberg
Cable soared today, squeezing shorts up to recent resistance levels...
Source: Bloomberg
Oil prices rallied back from overnight weakness with WTI hovering around $85 ahead of tonight's API data...
US NatGas prices soared today as the Freeport LNG terminal appears set to reopen (allowing exports to Europe and thus tightening domestic supply)...
Finally, the era of negative-yielding debt is almost over. As Bloomberg notes, the total market value of negative-yielding debt worldwide has fallen to just under $1 trillion and consists entirely of short-dated Japanese securities...
Source: Bloomberg
...And overnight we saw 2Y JGBs trade above zero for the first time since 2015...
Source: Bloomberg
At its peak there was over $18 trillion in global negative-yielding debt. How'd that cunning plan work out?
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