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Conflict Of Interest (rates): 10-year Treasury Yield Highest in Almost Two Years

The dollar was high and going higher. Emerging markets had been seriously complaining. In one, the top central banker for India outright warned, “dollar funding has evaporated.” The TIC data supported his view, with full-blown negative months, net…

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The dollar was high and going higher. Emerging markets had been seriously complaining. In one, the top central banker for India outright warned, “dollar funding has evaporated.” The TIC data supported his view, with full-blown negative months, net selling from afar that’s historically akin to what was coming out of India and the rest of the world. China was cutting its RRR multiple times.

This was all following May 29, 2018, too, a day in the global “bond market” which had left no doubt collateral conditions had already become seriously strained; the monetary tightening exclamation point on all of the above.

Clear dollar shortage stuff, one after another after another. And since the “bond market” and US Treasuries are at the center of it all, or closest viewpoint from which to peer inside the vast monetary shadows, LT UST yields of course…rose?

Huh?

Yeah, they did. Not only that, after having reached a high on May 17, the 10-year would climb further to its highest in seven years by early October. You might remember those days, it was in all the newspapers, splashed across the internet in every form of its mediums.



 

 



The bond bull was immediately declared deader than a doornail, done, fork stuck already in what was reported as its rotting carcass stinking up the place. Inflation had killed it off, too, they said. Get used to much, much higher rates because this sucker, Jay’s economy was absolutely roaring.

Obviously, none of it was true; not the bond “bull” bull, nor all the scattershot analysis thrown around, including a whole library of the same such commentary beyond the tiny sample reproduced (easily) above.

Barely over a month later, it all went downhill – literally, in the case of bond yields as well as the global economy.

So what did happen in 2018? How can bond yields still go up despite all those nasty things listed at the outset? And what might that episode three years ago tell us about our current markets and global situation?

First, always remember yield curve dynamics; the Treasury curve, like any other, isn’t monolithic. There are parts, and each piece is oftentimes influenced by separate factors. If you haven’t already, this is a good place to start for these basics.

In addition to nominal yields and the curve level, you always, always need to pay close attention to the shape – on the whole as well as in discrete parts – and how the profile changes over time. This is a dynamic monetary/financial/economic universe, and the curve distorts with meaning and purpose hardly anyone nowadays seems able to properly decode.

Though they are related, and do share some common factors, the balance of those can be quite different such that there are almost two curves operating simultaneously. The one at the front is most heavily inclined by monetary alternatives, and that money-like influence continues out into the middle of the notes – up to around the 5-year maturity (for a more detailed and complete description of these inner workings, click on the link above).

From the 7-year note on out to the long bond end, this is Irving Fisher’s territory, the land of inflation and growth expectations as only somewhat predisposed by the cross-currents and perceptions of those front-end conditions.

When there are times the Treasury curve really does act like two Treasury curves, the boundary falls somewhere in that 5-year to 10-year No Man’s Land (this is why, of all the curve’s calendar spreads, I always start with the 5s10s because it crosses this border and sends us absolutely clear and powerful signals about this front vs. back relationship).

What was happening throughout 2018 was the yield curve splitting in two. On the one side, up front, the Fed and its federal funds target along with the various reserve programs (RRP, IOER) offering money alternatives via that set of policies. According to Janet Yellen then Jay Powell’s FOMC, they believed like all the media articles above the country was about to get itself into inflationary trouble.

It was becoming too good, they reasoned.

To head off that “danger”, rate hikes (as well as QT, but that’s a somewhat related tangent not necessary to go over today). For the Treasury curve, it would mean upward nominal pressure from below, from the shortest run.



While all that was taking place in the short curve, the long end outright resisted the pressure even as yields here moved up, too. That was the back end squeeze, or flattening, competing narratives being played out in the whole curve’s shape. The overall shape flattened even as rates front to back rose because, Irving Fisher, growth and inflation expectations beyond any temporary short run Fed influence were not matching up with the Fed’s projections for those rate hikes.

This is where all those dollar shortage factors I cited at the outset had come into play. The more 2018 passed, the more doubts about longer run inflation and growth grew as signals of deflationary potential continued to come one after another. However, the process of sorting those competing probabilities took time; it was only over much time that the spectrum of possibilities began to more completely favor the long end’s pessimism.

This had meant up to October and early November 2018, the yield curve would rise in nominal level while at the same time flattening dramatically. The future before that point was still undecided as to which curve, front or back, would win out.

Right here is where the landmine comes into it, thus why I place so much emphasis on it. Time after time, the landmine has proved to be the moment when these conflicting viewpoints get settled. To date, they’ve always been settled to the long end’s doubts (which simply means long end doubts about deflationary risk and potential become just deflation).

After that point, the whole thing is united once again as it collapses even up in the front (December 2018’s inversion).

While everyone was told to focus exclusively on the highest-in-seven-years nominal 10s UST back in October and November 2018, that hadn’t actually meant anything useful or relevant; instead, the flat shape of the curve should’ve been everyone’s focus as it was those doubts even as interest rates rose and Powell’s hawks went unchallenged everywhere outside the yield curves second (back) half.

And they quickly melted away by the middle of November 2018 to leave everyone stunned; the bond “bull” very much alive and wreaking havoc yet again in Jay Powell’s expensive China shop, shelves overloaded with expensive media hot takes easily kicked over and trampled into forgettable dust.

You have probably heard that today, January 7, December’s Payroll Friday, the UST 10s closed up trading at 1.76%, the highest yield in nearly two years!! The media is again ablaze with BOND ROUT!!!!!, the new high being heralded as the latest definitive sign of the bond market giving up and coming around to the inflation-red-hot-economy Jay Powell’s FOMC is once again using to justify its hawkishness.

Like 2018, however, the yield curve has become similarly split and for all the same reasons. Over the past few weeks, the front end (out to the 5s) has been influenced by first the hawkish resolve (lots of rate hikes are coming!) before more recently having judged the omicron scare as little more than overkill.




Powell has previously emphasized how the pandemic would be the one factor which could derail his taper/rate hike plans. With omicron appearing less and less of a stumbling block, the Fed’s temporary influence has taken over the short end, the road clear for rate hike liftoff maybe even by March.

This has similarly extended into the long end in that same 2018 way, to the point today the 10-year yield traded higher than its March 2021 peak. Upward pressure from underneath as the Treasury market doesn’t see anything right now, nothing tangible or immediate which over the short run might have a high probability of stopping the FOMC.

This despite again all those dollar shortage warning signs as stated in the opening paragraph. The flat curve, however, shows that those are still being taken seriously even as LT rates trend moderately higher.

Powell’s economic optimism, if you want to call it that since much of it derives from the unemployment rate and wage data, has been traded more forthrightly into the front with omicron fears fading. This translates into these modestly higher nominal levels but not a steeper shape. 

It leaves us once more with these conflicting views meeting somewhere in the middle. 

With no 2021 or yet 2022 landmine, the yield curve is actually two curves again waiting for this clash or conflict of interest rates (thanks Mr. Tateo for suggesting this title) to be settled one way or the other. Balance of probabilities in the front are more favorable, yet still so much unappreciated negative potential keeps a lid on it at the back. 

There are other parts of the bond market equation to consider, as there had been three years ago, but I’ll save the similar move in TIPS real yields for next week. The eurodollar futures curve, still kinked but now un-inverted, I’ll also leave as a cliffhanger, too.



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Spread & Containment

Zinc Outlook 2022: Analysts Expect Small Refined Deficit

Click here to read the previous zinc outlook. After an uncertain 2020, zinc rose steadily in 2021, hitting a 14 year high in the second half of the year.The power crisis and increasing demand for the base metal as strict COVID-19-related lockdown restrict

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Click here to read the previous zinc outlook.

After an uncertain 2020, zinc rose steadily in 2021, hitting a 14 year high in the second half of the year.

The power crisis and increasing demand for the base metal as strict COVID-19-related lockdown restrictions were lifted supported prices for zinc during the 12 month period.

As the new year begins, the Investing News Network (INN) caught up with analysts to find out what’s ahead for zinc supply, demand and prices. Read on to learn what they had to say.


Zinc outlook 2022: 2021 in review


Zinc prices kicked off 2021 above the US$2,800 per tonne mark after rallying for most of the second half of 2020. A recovery in the steel sector helped the base metal throughout the first half of 2021 as COVID-19 lockdown measures eased, supporting demand for zinc.

Commenting on the main trends seen in the market in 2021, Helen O’Cleary of CRU Group told INN zinc’s demand recovery was stronger than expected in the US and Europe, but lagged in Asia excluding China.

In October, zinc prices hit their highest level in 14 years, hovering around the US$3,800 mark on the back of the power crisis and costs associated with carbon emissions.

“Zinc’s price outperformed expectations in 2021 on the back of strong demand and smelter disruption, particularly in Q4, when European smelters started to cut back due to record high energy prices,” O’Cleary said.

One of the world’s top zinc smelters, Nyrstar (EBR:NYR), said back in October that it was planning to cut production at its European smelter operations. Mining giant Glencore (LSE:GLEN,OTC Pink:GLCNF) also said it was adjusting production to reduce exposure to peak power pricing periods during the day.

Speaking with INN, Carlos Sanchez of CPM Group said zinc has been in recovery since prices bottomed out in 2020, helped in part by vaccination efforts globally and also by supply disruptions around the world.

“The most recent issue is the concern about high energy input costs into smelters in Europe — that's been pushing prices higher recently,” he said. Even though prices could not sustain that level until the end of the year, zinc remained above US$3,500 on the last trading day of 2021.

Zinc outlook 2022: Supply and demand


As mentioned, demand for base metals took an upward turn in 2021 as the world economy recovered on the back of stimulus plans and as vaccination rollouts took place in many parts of the world.

Looking at what’s ahead for zinc demand in 2022, CRU is expecting Chinese demand growth to slow to 1.1 percent year-on-year as the effects of stimulus wane.

“In the world ex-China we expect demand to grow by 2.4 percent, with the ongoing auto sector recovery partially offsetting the construction sector slowdown in Europe and the US,” O’Cleary said.

CPM is also expecting zinc demand to remain healthy in 2022, both inside and outside of China, including demand from developing countries. “One thing that remains uncertain is what will happen with COVID,” Sanchez said.

Moving onto the supply side of the picture, the analyst expects that if everything remains status quo, disruptions are unlikely to happen.

“There are going to be some blips here and there, but there have been some labor issues in Peru; yes, there's been some energy problems in Europe and China, but that's a fact in zinc output and in demand to an extent,” Sanchez said. “But really the catalyst that we don't know, and how it can affect prices, is how COVID will impact industries.”

For her part, O’Cleary is expecting most disruptions to happen in the first quarter, with CRU currently having a disruption allowance of 55,000 tonnes for that period.

“But this may well tip over into Q2,” she said. CRU is expecting mine supply to grow by 5.1 percent year-on-year in 2022, and for the concentrates market to register a 190,000 tonne surplus.

Meanwhile, smelter output is forecast to grow by less than 1 percent year-on-year in 2022, according to the firm, which is currently forecasting a small refined zinc deficit in 2022.

“Should smelter disruption exceed our 55,000 tonne allowance the deficit could grow,” O’Cleary said. “But high prices and a tight Chinese market could lead to further releases of refined zinc from the State Reserve Bureau stockpile, which could push the market towards balance or even a small surplus.”

Similarly, CPM is expecting the market to shift into a deficit in 2022. “That's due to the strong demand, recovering economies of COVID and its financial economic effects,” Sanchez said.

Zinc outlook 2022: What’s ahead


Commenting on how zinc might perform next year, O’Cleary said prices are likely to remain high in Q1 due to the threat of further energy-related cutbacks in Europe during the winter heating season.

O’Cleary suggested investors keep an eye on high prices and inflation, as they could hamper zinc demand growth.

Similarly, CPM expects prices to stay above current levels and to average around US$3,400 for the year. “I wouldn't be surprised to see zinc top US$4,000,” Sanchez said. “But at the same time, I don't think it holds above there; you'd have to have really strong fundamentals for that to happen, stronger than what's happening now.”

The CPM director suggested zinc investors should keep an eye on COVID-19 developments and be quick movers, taking a position whether it's short or long.

Looking ahead, FocusEconomics analysts see prices for zinc cooling markedly next year before falling further in 2023, as output gradually improves and new mines come online.

“Moreover, fading logistical disruptions and easing energy prices will exert additional downward pressure, although solid demand for steel will continue to support prices,” they said in their December report, adding that pandemic-related uncertainty is clouding the zinc outlook.

Panelists recently polled by the firm see prices averaging US$2,827 in Q4 2022, and US$2,651 in Q4 2023.

Don’t forget to follow us @INN_Resource for real-time news updates.

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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Economics

Taylor Wimpey share price up 3% as housebuilder promises to return more cash to investors

The Taylor Wimpey share price has risen by 3.3% today, reversing some of the…
The post Taylor Wimpey share price up 3% as housebuilder promises to return more cash to investors first appeared on Trading and Investment News.

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The Taylor Wimpey share price has risen by 3.3% today, reversing some of the losses taken over a bad start to the year that has seen the housebuilder’s valuation decline by over 10%, after the company today promised investors it would return more cash to them over coming months. The windfall comes as a result of what Taylor Wimpey described as an “excellent” 2021.

Demand for larger properties, especially houses with gardens, has leapt as a result of the pandemic. As well families spending more time at home desiring more space, buyers were further encouraged to take the leap by the stamp duty holiday that ran from 2020 until late last year, offering savings of up to £15,000. Rock bottom interest rates and fierce competition between providers also led to cheaper mortgages which helped maximise selling prices.

taylor wimpey plc

The combination of favourable headwinds means the homebuilder expects to now realise an operating profit of £820 million for 2021 from the sale of a little under 14,000 homes. That represents a growth of 47% in the number of new-built properties delivered compared to 2020, when construction work and administrative processes were delayed by Covid-19 disruption.

As a result, Taylor Wimpey finished last year with a bank balance of £837 million. It will now, it says, see how much cash is left once it has paid out its dividend and planned for expenses over the rest of the year. Any “excess cash” surplus will be returned to shareholders, most likely through a major share buyback. The company will confirm details alongside its full-year results, due to be reported in March.

Taylor Wimpey is worth around £6 billion and is a member of the FTSE 100. It has existed in its present format since 2007 when created out of a merger between the housebuilders George Wimpey and Taylor Woodrow. The deal was legendarily struck by current chief executive Pete Redfern at a service station on the M40.

Despite sector concerns over how much it will cost to replace dangerous cladding used on buildings over the past 20 years and now banned as a result of the Grenfell Tower scandal, Taylor Wimpey has repeatedly stated it is confident the £165 million it has set aside to cover related expenses will suffice. It has been challenged on the sum but still considers it a “reasonable estimate”.

If the cladding provision does prove sufficient, that should leave plenty of cash for redistribution to investors through a major share buyback over 2022.

The post Taylor Wimpey share price up 3% as housebuilder promises to return more cash to investors first appeared on Trading and Investment News.

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Spread & Containment

Zinc Outlook 2022: Small Refined Zinc Deficit Ahead

Click here to read the previous zinc outlook. Following an uncertain 2020, zinc prices steadily rose throughout 2021 to hit a 14 year high in the second half of the year.The power crisis and an increasing demand for the base metal as the strict lockdown..

Published

on



Click here to read the previous zinc outlook.

Following an uncertain 2020, zinc prices steadily rose throughout 2021 to hit a 14 year high in the second half of the year.

The power crisis and an increasing demand for the base metal as the strict lockdown restrictions were lifted supported prices during the 12 month period.

As the new year begins, the Investing News Network (INN) caught up with analysts to find out what’s ahead for zinc supply, demand and prices.


Zinc outlook 2022: 2021 in review


Prices kicked off the year above the US$2,800 per tonne mark after rallying for most of the second half of 2020. The recovery in the steel sector helped the base metal throughout the first half of 2021 as COVID-19 lockdown measures eased, supporting demand for zinc.

Commenting on the main trends seen in the market in 2021, Helen O’Cleary of CRU Group told INN zinc’s demand recovery was stronger than expected in the US and Europe but lagged in Asia excluding China.

In October, zinc prices hit their highest level in 14 years, hovering around the US$3,800 mark on the back of the power crisis and cost associated with carbon emissions.

“Zinc’s price outperformed expectations in 2021 on the back of strong demand and smelter disruption, particularly in Q4 when European smelters started to cut back due to record high energy prices,” O’Cleary said.

One of the world’s top zinc smelters, Nyrstar (EBR:NYR), said in October it was planning to cut production at its European smelter operations. Mining giant Glencore (LSE:GLEN) also said it was adjusting production to reduce exposure to peak power pricing periods during the day.

Speaking with INN about zinc’s performance, Carlos Sanchez of CPM Group said zinc has been in recovery since prices bottomed out in 2020, helped in part by vaccination globally and also by supply disruptions around the world.

“The most recent issue is the concern about high energy input costs into smelters in Europe — that's been pushing prices higher recently,” he said.

Even though prices could not sustain that level until the end of the year, prices remained above US$3,500 on the last trading day of 2021.

Zinc outlook 2022: Supply and demand


As mentioned, demand for base metals saw an upward turn in 2021 as the world economy recovered on the back of stimulus plans and as vaccination rollouts took place in many parts of the world.

Looking at what’s ahead for demand in 2022, CRU is expecting Chinese demand growth to slow to 1.1 percent year-on-year as the effects of stimulus wane.

“In the world ex. China we expect demand to grow by 2.4 percent, with the ongoing auto sector recovery partially offsetting the construction sector slowdown in Europe and the US,” O’Cleary said.

CPM is also expecting demand to remain healthy in 2022, both in China and outside of China, including demand from developing countries.

“One thing that remains uncertain is what will happen with COVID,” Sanchez said.

Moving onto the supply side of the picture, the analyst expects that if everything remains status quo, disruptions are unlikely to happen.

“There are going to be some blips here and there, but there have been some labor issues in Peru, yes, there's been some energy problems in Europe and China, but that's a fact in zinc output and in demand to an extent,” Sanchez said. “But really the catalysts that we don't know, and how it can affect prices is how COVID will impact industries.”

For her part, O’Cleary is expecting most disruptions in Q1, with CRU currently having a disruption allowance of 55,000 tonnes for that period.

“But this may well tip over into Q2,” she said. CRU is expecting mine supply to grow by 5.10 percent year-on-year in 2022 and for the concentrates market to register a 190,000 tonnes surplus.

Meanwhile, smelter output is forecast to grow by less than 1 percent year-on-year in 2022, according to the firm, which is currently forecasting a small refined zinc deficit in 2022.

“Should smelter disruption exceed our 55,000 t allowance the deficit could grow,” O’Cleary said. “But high prices and a tight Chinese market could lead to further releases of refined zinc from the State Reserves Bureau stockpile, which could push the market towards balance or even a small surplus.”

Similarly, CPM Group is also expecting the market to shift into a deficit in 2022.

“That's due to the strong demand, recovering economies of COVID and its financial economic effects,” Sanchez said.

Zinc outlook 2022: What’s ahead


Commenting on how prices might perform next year, O’Cleary said prices are likely to remain high in Q1 due to the threat of further energy-related cutbacks in Europe during the winter heating season.

O’Cleary suggested investors to keep an eye on high prices and inflation, as these factors could hamper zinc demand growth.

Similarly, CPM Group is expecting prices to remain above current levels and to average around US$3,400 for the year.

“I wouldn't be surprised to see zinc top US$4,000,” Sanchez said. “But at the same time, I don't think it holds above there; you'd have to have really strong fundamentals for that to happen, stronger than what's happening now.”

The CPM director suggested zinc investors should keep an eye on COVID developments and be quick movers, taking a position whether it's short or long.

Looking ahead, for FocusEconomics analysts, prices for zinc are seen cooling markedly next year before falling further in 2023, as output gradually improves and new mines come online.

“Moreover, fading logistical disruptions and easing energy prices will exert additional downward pressure, although solid demand for steel will continue to support prices,” they said in their December report, adding that pandemic-related uncertainty clouds the outlook.

Panelists recently polled by the firm see prices averaging US$2,827 per metric tonne in Q4 2022 and US$2,651 per metric tonne in Q4 2023.

Don’t forget to follow us @INN_Resource for real-time news updates.

Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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