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McCullough: What Is Plunging 10-Year Yield Telling Investors?

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes a look at U.S. bond yields sinking to record lows and what may lie ahead.

 

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What The Mainstream Media Missed About All-Time Lows For 10-Year Yield

Takeaway: All-time lows in the 10-year Treasury yield is continued vindication for our Macro team's #GrowthSlowing call.

What The Mainstream Media Missed  About All-Time Lows For 10-Year Yield - bond yields 

 

All-time lows in 10-year Treasury yields this morning.

 

Yup. 

 

Yet more vindication of our Macro team's global #GrowthSlowing call.

 

Here's brief analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"While “stocks” have these 1-week ramps, you have to take on a lot of volatility to time those returns – with the Long Bond and it’s proxies, both absolute and volatility adjusted returns have been awesome. All-time low this am for the US 10yr of 1.38% ahead of the Friday jobs report and the Q2 Earnings Recession season."

 

 

Macro tourists and the mainstream media missed an important callout in reporting fresh lows for sovereign bond yields this morning...

 

The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings) hit a new low for #TheCycle of 80bps today:

 

What The Mainstream Media Missed  About All-Time Lows For 10-Year Yield - yield spread 7 5

 

That's why our favorite macro call, long the Long Bond (TLT), continues to outperform:

 

What The Mainstream Media Missed  About All-Time Lows For 10-Year Yield - tlt v spy 7 5

 

In short, the bond market has figured out what still puzzles most stock-centric investors...

 

Global #GrowthSlowing continues to rule the day


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Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

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Daily Market Data Dump: Tuesday - equity markets 7 5

 

Daily Market Data Dump: Tuesday - sector performance 7 5 16

 

Daily Market Data Dump: Tuesday - volume 7 5

 

Daily Market Data Dump: Tuesday - rates and spreads 7 5

 

Daily Market Data Dump: Tuesday - currencies 7 5


TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT

Takeaway: With investors hopeful that central banks will provide support following Britain's exit vote, risk measures eased last week.

 

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM11

 

Key Takeaway:

Investor hope/optimism that central banks would provide support following Britain's exit vote put risk measures into reverse last week. Domestic bank CDS, Asian bank CDS, and sovereign CDS all tightened, while European bank CDS held steady. Additionally, the Euribor-OIS spread, a measure of counterparty risk in Europe tightened on the week, the US high yield YTM dropped by -36 bps to 6.8%, and the price of Chinese steel bounced 3.6% W/W.

Our heatmap below is currently positive on the short term while, but mixed over the intermediate and longer term.

 

Current Ideas:

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 6 of 13 improved / 1 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Negative / 4 of 13 improved / 4 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Negative / 3 of 13 improved / 3 out of 13 worsened / 7 of 13 unchanged

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM15


1. U.S. Financial CDS
– As fears over Brexit exit eased, swaps tightened for 8 out of 13 domestic financial institutions. While the median CDS remains 5 bps wider than one month ago, W/W it is -9 bps tighter at 91.

Tightened the most WoW: JPM, WFC, C
Widened the most WoW: PRU, MET, AIG
Widened the least/ tightened the most WoW: JPM, WFC, ACE
Widened the most MoM: PRU, AIG, HIG

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM1

 

2. European Financial CDS – Financials swaps mostly tightened in Europe last week. While the median CDS was unchanged at 138, the average move W/W was a -10 bps tightening as the BOE voiced a plan for interest rate cuts and Brexit fears eased somewhat.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM2

 

3. Asian Financial CDS – Asian financials CDS were mixed last week. In China, bank swaps tightened significantly, between -17 and -20 bps. In India, 2/3 bank swaps tightened. Meanwhile, all Japanese CDS widened.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portuguese sovereign swaps tightened the most, by -35 bps to 290.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM18

 

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM3


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Brazilian swaps tightened the most, by -28 bps to 314.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 36 bps last week, ending the week at 6.81% versus 7.18% the prior week.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 9.0 points last week, ending at 1904.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM6

8. TED Spread Monitor  – The TED spread rose 1 bps last week, ending the week at 40 bps this week versus last week’s print of 39 bps.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM7

9. CRB Commodity Price Index – The CRB index rose 1.3%, ending the week at 194 versus 192 the prior week. As compared with the prior month, commodity prices have increased 3.0%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 4 bps to 7 bps.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 bps last week, ending the week at 2.03% versus last week’s print of 2.04%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM10

12. Chinese Steel – Steel prices in China rose 3.6% last week, or 85 yuan/ton, to 2434 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amounts to 149.5 trillion RMB as of May 31, 2016 (data released 6/15/2016), which is up +15.5 trillion RMB or +11.5% year over year. Month-over-month, credit is up +553 billion RMB or +0.4%. Note: this data is only updated monthly.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 85 bps, -8 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 1 bps to 39 bps.

TUESDAY MORNING RISK MONITOR | HOPING FOR CENTRAL BANK SUPPORT - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT

Patrick Staudt, CFA 



Call Invite | Q3 2016 Macro Themes Conference Call (7/7/16 at 11:00AM ET)

We will be hosting our highly-anticipated Quarterly Macro Themes conference call on Thursday, July 7th at 11:00AM ET. Led by CEO Keith McCullough, the presentation will detail the THREE MOST IMPORTANT MACRO TRENDS we have identified for the quarter and the associated investment implications.

 

CLICK HERE to watch live.

Call Invite | Q3 2016 Macro Themes Conference Call (7/7/16 at 11:00AM ET) - Slide1

 

Q3 2016 MACRO THEMES OVERVIEW:

 

  • #ProfitCycle:  Embedded in the SPY’s lofty multiple are consensus estimates that forecast a return to positive earnings growth in Q2 and Q3, as well as a material ramp to near double-digit growth in Q4 – effectively implying Q1 was the end of the domestic corporate profit recession. Conversely, the confluence of our top-down and bottom-up analysis suggests earnings growth is likely to reach new lows in the Q2/Q3 timeframe. Moreover, earnings in over-owned sectors like Consumer Discretionary, Financials and Health Care are at risk of meaningful surprises to the downside due to the ongoing #LateCycle slowdown in consumption and employment growth.
  • #ConsumerCredit:  At the end of every economic expansion, the preponderance of investors have seemingly forgotten that #TheCycle actually does cycle. But as recent commentary from Synchrony Financial (SYF) and CarMax (KMX) has alluded to, the domestic consumer credit cycle has inflected to the downside and our work suggests said deterioration is likely to remain ongoing for at least the next few quarters. Moreover, this deterioration has wide-ranging implications for investors.
  • #EuropeImploding:  Brexit happened, but which other countries may leave the EU?  We’ll outline the countries that we believe have the largest political risk and quantify Europe’s cyclical and structural growth and inflation headwinds within our ongoing theme of #EuropeSlowing.  We’ll present why we believe fundamentals can fall further and why the Euro may hit new lows.

 

CALL DETAILS

  • Video Access:
  • Toll Free:
  • UK: 0
  • Confirmation Number: 13636284
  • Materials: HERE 
  • Watch Live: HERE

 

As always, our prepared remarks will be followed by a live, anonymous Q&A session. Please submit your questions to . Also, for those of you who cannot join us live, we will be distributing a replay video of the call shortly after it concludes.

 

Kind regards,

 

-The Hedgeye Macro Team


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