Halyard’s Weekly Wrap – 11/12/21

Wednesday November 10th provided a proverbial “gut punch” to the capital markets. The day started with the inflation report for October that was way above expectations and was capped with a 30-year bond auction that was an absolute disaster.  Year over year CPI came in at 6.2% versus the 5.4% registered last month.  Fed Chairman Powell continues to believe that the uptick in inflation is going to pass but it’s not happening, and people are not happy about it.  In the latest release, energy had an outsized effect on the result, climbing 4.8% month-over-month, but that represents a little over 7% of the total.  Reviewing the various subcategories, not a single category was down on the month, and the largest, housing, rose 0.7% for the month.  That component has been relatively subdued to date and seems to be finally reflecting what has happened with home prices over the last year.  As a reminder, the Bureau of Labor Statistics measure of housing inflation uses what’s known as owner’s equivalent rent (OER), not actual sales.  It’s no secret that OER consistently under reports home price inflation but the BLS has never seemed to care.

After digesting the inflation news, the Treasury Department auctioned $25 billion 30-year bonds and as one observer put it, “it was an unmitigated disaster!” The auction cleared at 1.94%, 5.2 basis point away from where it was trading at auction time.  In the Treasury market, the to be auctioned note is traded for several days before the actual auction occurs, in what is known as the “when issued” market.  Through this methodology, the Treasury hopes that there is no surprise at auction time.  A sloppy auction is a symptom that something is not right in the market.  This is the fourth sloppy auction this year and the Fed should be highly concerned.  The weak seven-year auction earlier this year was an “eye-brow raiser,” but it was explained away as being an odd maturity with no natural buyers.  But the 30-year bond is a different story.  It, along with the 10-year note, are benchmark interest rates and bank and insurance companies have an ongoing demand for them.  The number of bids, at 2.2 times the size of the auction, was on the smaller side, but posed no threat of causing the auction to fail.  However, we deem the enormous tail as an indication that Wall Street is worried about who will finance the ballooning debt once the Fed exits secondary market buying.

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