Pro Perspectives 7/6/23





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July 06, 2023

We left off yesterday looking at this chart of the 10-year yield …
After being well contained over the past three months, under the 4% level, we headed into this morning's jobs numbers with what looked like a technical breakout, and a potential catalyst for a revisit of 4%.
With that, the ADP report came in much hotter than expected this morning.  
Yields did this …
So, we're back above this 4% area for the world's most important interest rate (the anchor for global rates).  And this is where things have tended to break in the global financial system.  
Most recently, it was the collapse of Silicon Valley Bank, when the 10-year traded up to 4.09%.  The crypto-exchange FTX blew up when the 10-year traded up to 4.22%.  The Bank of Japan was forced to intervene to curb the decline in the yen, when the U.S. 10-year traded up to 4.34%, back in October.   And the UK bond market nearly melted down in late September, when the U.S. 10-year traded to 4.02%.
As you can see in the chart below, we haven't spent a lot of time above 4% (the red line), before the fireworks start.  And we revisit this time with UK bond yields now trading above the levels that created stress in UK pension funds last September.    
Notably, the cure to the level of rates, in the events denoted in the chart above, has been some form of intervention (with the exception of FTX).
That brings us back to an image from one of my notes last year, when the Fed was just kicking off its tightening program. 


Remember, we've yet to see an example of a successful exit of QE.  So the above has been the plan all along:  plug the holes, as they open (in coordination).


On that note, as we've discussed in my daily notes, there is one central bank that has played a key role in suppressing the U.S. benchmark government bond yield (keeping this key global interest rate out of the danger zone):  the Bank of Japan.

There's probably a good reason that Ueda (the Governor of the Bank of Japan) said last week, while on stage with his global central banking counterparts, that rates would go up by a large margin in Japan, "IF they GET to normalize policy."  It doesn't look like it will be anytime soon, despite their own forecast of hitting their inflation target by next year.  The rest of the world needs them to continue buying assets.