Mild UST rally; FIG issuance; AI bubble?
Treasuries are ending the session with mild gains, with yields up to 3.4bps lower on the day. The 10y note yield is last 2.3bps lower at 3.807% while 2s10s is roughly unchanged at -94.4bps and 5s30s 2.7bps steeper at -9.2bps. Equities closed higher (DJIA +0.22%, S&P +0.5% and Nasdaq +0.98%).
IG new issuance saw two FIGs – JP Morgan ($4.5bn 2-part) and Wells Fargo ($1.725bn perpNC5). In total, $7.125bn priced. Tomorrow sees Morgan Stanley and BofA earnings releases. Swap spreads narrowed amid mostly lower than average volumes.
Ahead, strategists at Citigroup wondered recently “can the seasonal summer rally be the catalyst for yields to move lower?” and they come to the conclusion that ‘no it cannot.’
To be sure, the bank does not believe that last week’s move (the benchmark 10y UST yield fell from 4.08% last Monday morning to 3.75% at close on Friday) “is the beginning of another rally. We now see risks pointing back to higher yields due to the building tech stock bubble which is gaining momentum and could very well overwhelm traditional macro drivers of rates.”
While the inflation monster has been tamed grew last week with the drop in June yoy CPI to a below-forecast 3.0%, Citi sees a clear threat to the seemingly bullish picture for Treasuries.
Further, Citi is worries about issues related to the great bogeyman of our age, AI:
- “The beginnings of a bubble formation in tech stocks, driven in large part by the AI frenzy. As our GAA team has written recently, a bubble in tech stocks can have a duration of as much as ten months or more. The recent bubble in crypto for example took 12 months from Oct 2020 to peak in Nov 2021, before bursting. With the tech stocks frenzy starting in March or May (the determination is subjective), i.e. only two to four months ago, there is plenty of time for the bubble to inflate further, also going by experience from the dot-com bubble period.”
- “Back then, the bubble period was Nov-1998 to Apr-2001, i.e. about 30 months for a full round trip in the NDX, 16 months to the top, followed by 13 months to the bottom after the bubble peaked in March 2000. In that period, bond yields rose, as investors shrugged off the safety of Treasuries for the allure of higher returns in internet stocks and tech stocks broadly.”
- “We think there is a strong likelihood of a similar dynamic happening again, especially as momentum strategies chase tech stocks higher. Eventually, the bubble would of course burst, and the ensuing collateral damage will bring bond yields lower – we just don’t know the timing of that yet. Meanwhile, in the quiet summer months, the bubble can grow.”
2s -10bps (-0.25bps), 3s -12.5bps (+0.5bps), 5s -22bps (-0.375bps), 7s -28bps (-0.625bps), 10s -26.75bps (-0.625bps), 20s -63.625bps (-0.125bps), 30s -67.125bps (-0.625bps).
For a complete review of IG new issuance over the past week, please see USD New Issues.
- World Bank plans a $TBA 7y. Leads BMO, BofA, JPM, MS. Aaa/AAA. Price talk SOFR MS +44bps area. Expected to price tomorrow.
- CDP Financial is working on a $TBA 5y. Leads Barclays, Citi, RBCCM, Scotia. Aaa/AAA/AAA. Price talk SOFR MS +65bps area. Expected to price tomorrow.
- Panama has mandated Morgan Stanley and Prival for a series of investor calls starting today ahead of a $TBA 10y.
- Mutual of Omaha has mandated JPM, Citigroup, GS and PNC for series of fixed income meetings ahead of a USD denominated senior secured medium-term note.
- Abu Dhabi Future Energy Company (Masdar) has mandated Citi and First Abu Dhabi bank to lead a 10y USD Green bond, following investor calls later today.
- Saudi food and beverage company Almarai has mandated HSBC and Standard Chartered to lead a USD Sukuk bond.
- Wells Fargo launched a $1.725bn perpNC5. Self-led. Baa2/BB+/BBB. Price talk 7.625% area.
- JP Morgan priced a $4.5bn 2-part ($2.5bn 6y NC5 and $2bn tap of its 5.35% Jun 2034). Self-led. +128bps and +150bps.
- Conagra priced a $500m 3y. Leads BofA, GS, Mizuho and WFS. Baa3/BBB-/BBB-. +100bps.
- Boston Gas priced a $400m 30y. Leads Barclays, MUFG, SMBC and WFS. Baa1/BBB+. +218bps.