Bond rally fails, $16 billion test in sight: Markets Wrap

(Bloomberg) — The rally in the world’s largest bond market toward its best month since March lost steam Monday as traders prepared for a $16 billion sale of 20-year Treasury bonds.

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Wall Street continued to keep a close eye on debt auctions, especially after the U.S. recently offered an unusually high premium for the sale of 30-year securities. A strong reception would be a confirmation of the push in November. And vice versa. These sales are also exerting a growing influence on stocks, underscoring how interest rate trends have taken a toll on markets lately.

US 10-year yields rose and remained below 4.5%. Gains in stocks pushed the S&P 500 to its highest level since August, while the tech-heavy Nasdaq 100 was on track for a 22-month high. Microsoft Corp. rose as the software giant tapped OpenAI co-founders Sam Altman and Greg Brockman to lead its new internal advanced artificial intelligence research team. The dollar was set at an 11-week low.

Andrew Brenner, head of international fixed income at NatAlliance Securities, said holding 20-year Treasuries in a holiday-shortened week is causing the market to be “unnerved” ahead of the sell-off.

“A potential catalyst that could shake up markets today is the 20-year Treasury bond auction, as weak results could trigger a rebound in yields – particularly given this week’s slowing footfall and consequent less liquid market conditions across asset classes,” said Tom Essaye, a former Merrill Lynch trader who founded the newsletter The Sevens Report.

“There is good reason to believe that the 20s will be better received than this month’s 10s and 30s, but we will respect historical trends and watch for a small outlier this afternoon,” said Ben Jeffery, US -Interest Rate Strategist at BMO Capital Markets.

The story goes on

The “unsustainable state” of the budget is leading to a significant increase in government bond issuance – and combined with demand issues, a higher interest rate environment appears justified for a longer period of time, according to Principal Asset Management.

“Government bonds offer extremely attractive yields,” the company said. “And while the potential for capital appreciation may be limited given a looming economic slowdown, the assurance of stable income from government bonds makes them a solid option for investors who value stability ahead of an uncertain 2024.”

After weaker-than-expected inflation data, the Bloomberg US Aggregate Index – which tracks $25 trillion in investment-grade government and corporate bonds – rose 1.4% last week and is down 0 for the year .5% increased. The value posted a record loss of 13% in 2022 and fell 1.5% the previous year.

With the dollar rally now stalled, some solid data from the real sector is needed to challenge the Fed’s current dovish narrative, says Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.

“The U.S. economy continues to grow above trend even as the rest of the world slips into recession, while price pressures remain so persistent that the Fed cannot cut interest rates as quickly or as sharply as the market thinks,” Thin remarked. “However, the dollar remains vulnerable until we see a change in market sentiment and expectations.”

UBS Global Wealth Management’s Solita Marcelli expects the US dollar to remain stable in the first months of 2024 due to robust economic growth and high interest rates compared to the rest of the world.

Read: Yellen says US is making ‘significant progress’ in reducing inflation

As earnings season comes to a close, investors will also be watching for results from a handful of retailers and technology companies.

Nvidia Corp.’s quarterly results could exceed investors’ high expectations thanks to strong demand for generative artificial intelligence. Best Buy Co., Nordstrom Inc. and Lowe’s Cos. are expected to see declining sales, reflecting the decline in consumer spending.

To some market observers, the S&P 500’s rally appears increasingly unsustainable. Strategists surveyed by Bloomberg in mid-October predicted on average that the index would end the year at 4,370 – but it is already trading above 4,500.

Investors who believe that “Santa came to the market early” may want to consider year-end put option spreads on companies like Expedia Group Inc., Carnival Corp., Nvidia and Intel Corp. or RBC Capital Markets derivatives strategist Amy Wu Silverman wrote.

Meanwhile, some of Wall Street’s top strategists are divided when it comes to Corporate America’s earnings outlook next year. While Citigroup Inc.’s Scott Chronert expects gains to continue even if the economy slips into recession, JPMorgan Chase & Co. strategist Mislav Matejka says declining pricing power would hurt overall sales and margins. regardless of whether growth slows.

A Citigroup index shows U.S. earnings estimate downgrades outnumbered upgrades for nine weeks in a row, the longest streak since February. Chronert – an equity strategist at the bank – does expect analysts’ estimates for 2024 to fall in the coming quarter – but that would only lower the bar for companies, he said.

Read: Black Friday and Cyber ​​Monday spending expected to hit new highs

About seven companies plan to sell new U.S. investment-grade bonds on Monday, according to an informal survey of credit underwriters who declined to name the companies.

This week’s volume will be lower than the last two weeks, with most syndicate offices estimating new bond sales at around $10 billion. The bulk of the volume is expected to come today, with perhaps some laggards on Tuesday before the Thanksgiving holiday slowdown begins. No deals are expected from Wednesday to Friday.

Elsewhere, Germany is considering a drastic overhaul of its federal budget for this year, including easing restrictions on net new borrowing, following the country’s top court ruling last week, people familiar with the discussions say.

The European Central Bank may have to raise borrowing costs again if investor bets on monetary easing undermine the institution’s policy stance, said ECB Governing Council member Pierre Wunsch.

Oil prices rose as traders waited to see whether the Saudi-led OPEC+ alliance will step in to boost prices.

Read: Five key charts to watch in global commodities this week

Company highlights:

• Boeing Co. was upgraded to buy by Deutsche Bank AG as aircraft deliveries begin to accelerate.

• Bayer AG was reeling after suffering major setbacks in court and in drug development, increasing pressure on its new boss to come up with a turnaround plan.

• Bristol Myers Squibb and 2seventy bio Inc. slumped after saying the Food and Drug Administration would convene an advisory committee meeting to review data surrounding a cancer drug application and that no decision would be made by the scheduled action date The application will be decided on December 16th.

• NRG Energy Inc. is overhauling its management after the independent power producer reached an agreement with activist investor Elliott Investment Management LP.

Important events this week:

• ECB President Christine Lagarde and German Finance Minister Christian Lindner speak on Tuesday

• Existing home sales in the US, Tuesday

• The FOMC will release the minutes of its November 1 policy meeting on Tuesday

• Nvidia’s results, Tuesday

• Canada’s government’s fiscal and economic outlook update, Tuesday

• Eurozone consumer confidence, Wednesday

• Initial U.S. jobless claims, University of Michigan consumer sentiment, durable goods, Wednesday

• Bank of Canada Governor Tiff Macklem speaks on Wednesday

• Eurozone S&P Global Manufacturing & Services PMI, Thursday

• Thanksgiving Holiday – US Markets Closed – Thursday

• ECB publishes report on October monetary policy meeting on Thursday

• Germany IFO business climate, Friday

• US S&P Global Manufacturing PMI, Friday

• Black Friday, the traditional start of the Christmas shopping season in the USA

• Christine Lagarde from the ECB speaks on Friday

Some of the key moves in the markets:

Shares

• The S&P 500 rose 0.4% at 11:09 a.m. New York time

• The Nasdaq 100 rose 0.7%

• The Dow Jones Industrial Average rose 0.3%

• The Stoxx Europe 600 rose 0.1%

• The MSCI World Index rose 0.5%

Currencies

• The Bloomberg Dollar Spot Index fell 0.4%

• The euro rose 0.2% to $1.0940

• The British pound rose 0.2% to $1.2493

• The Japanese yen rose 0.9% to 148.35 per dollar

Cryptocurrencies

• Bitcoin rose 1.4% to $37,528.73

• Ether rose 3% to $2,043.35

Tie up

• The 10-year Treasury yield rose three basis points to 4.47%

• The 10-year German government bond yield rose three basis points to 2.61%

• The 10-year UK government bond yield rose two basis points to 4.13%

raw materials

• West Texas Intermediate crude rose 2.5% to $77.75 a barrel

• Spot gold fell 0.4% to $1,973.58 an ounce

This story was produced with support from Bloomberg Automation.

– With support from Elizabeth Stanton, Alexandra Semenova and Sagarika Jaisinghani.

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