Another big European bank in the headlines last night, Deutsche Bank, became the latest focus of the banking turmoil in Europe as ongoing concern about the industry sent its shares slumping the most in three years and the cost of insuring against default rising. As of yesterday, there was a feeling that the banking issues were settling, and financial institutions were working through their debt mismatches. The bank’s stock dropped 15%, the index of European banks dropped 5.7% led by Commerzbank AG, Spain’s Banco de Sabadell SA and France’s Societe Generale SA also saw steep drops. The Federal Reserve to the Bank of England this week raised interest rates once again, keeping their focus on inflation amid hopes that the worst of the financial turmoil was past.
The news has revived the view that with the credit issues brewing the central banks will have to curtail their inflation fights and stop rate increases. For the European Central Bank and the Bank of England, traders no longer price in an additional quarter-point rate hike. US swap rates linked to policy meeting dates almost completely abandoned wagers on a May increase, but still see a 25 bp increase at the June FOMC meeting (14th), that is light years in this current environment. “The speed at which 2023 has rotated through expectations of hard versus soft landing, cycle extension, and now financial instability is an incredible example of the cycle volatility which is likely to persist while inflation remains elevated,” said Martin Harvey, a Wellington Management portfolio manager who runs the Hartford World Bond Fund and is bullish on bonds relative to other asset classes.
The reaction sent the 10 year breaking its four month technical resistance at 3.40% down to 3.30% -12 bps from yesterday and now the lowest 10 year note yield since Sept 2022. The more sensitive 2 year note yield at 9 am this morning 3.62% -22 bps, down 50 bps since Wednesday. The stock indexes took a hit, at 5 am the DJIA down over 300 points, although some improvement by 8:30 am.
Feb durable goods orders this morning expected +1.5% m/m declined 1.0%, ex transportation expected +0.3% was unchanged (0.0%). With renewed banking issues the report hardly saw the light and went by unnoticed.
At 9:30 am the DJIA opened -168, NASDAQ -34, S&P -16. 10 year 3.30% -12 bps. The 6.0 30 year FNMA coupon at 9:30 am +8 bps and +10 bps from 9:30 am yesterday; the 5.5 coupon +16 bps and +16 bps from 9:30 am yesterday.
The Deutsche Bank issue overnight has revived fears over banks health. The 10, the lowest level since last September hit 3.30% this morning, but so far MBS markets are not joining in the strong decline, at 10 am the 5.5 coupon +11 bps after increasing 16 bps at 9:30 am. The movement overnight may be too aggressive, the 10 off its best level, 3.36% -6 bp (3.00% low). By 10 am MBS prices were down 8 bps on the day after +16 bps at 9:30 am.
PRICES @ 10:00 AM
10 yr note: 3.36% -6 bp
5 yr note: 3.38% -6 bp
2 Yr note: 3.75% -10 bp
30 yr bond: 3.66% -4 bp
Libor Rates: 1 mo 4.845%; 3 mo 5.134%; 6 mo 5.143%; 1 yr 5.107% (3/23/23)
30 yr FNMA 6.0: @9:30 am 102.16 +8 bp (+10 bp from 9:30 am yesterday)
30 yr FNMA 5.5: @9:30 am 101.27 +16 bp (+16 bp from 9:30 am yesterday)
30 yr GNMA 5.5: @9:30 am 101.45 +14 bp (+12 bp from 9:30 am yesterday)
Dollar/Yuan: $6.8701 +$0.0502
Dollar/Yen: 130.41 -0.45 yen
Dollar/Euro: $1.0752 -$0.0081
Dollar Index: 103.13 +0.60
Gold: $2000.90 +$5.00
Bitcoin: 28.028 -284
Crude Oil: $68.13 -$1.83
DJIA: 31.949 -156
NASDAQ: 11,737 -51
S&P 500: 3931 -18