Evening Brief – 09.06.23
An Eye on Oil, Corporate Issuance
This rise in oil prices continues a pattern that began at the end of June, when WTI Crude hit a low of roughly $67 per barrel. The price was down almost 45% year on year at its lows in June. It’s now recovered nearly all its losses, down only about 3% from last year.
The oil rally has already had a noticeable impact on fuel prices and is projected to result in a bump in consumer prices in August, so the concern is that it will exacerbate those pressures in the fourth quarter data.
This might create a difficult quandary for central bankers when several economic indicators (manufacturing, employment) are declining, as they must determine whether to focus on still high inflation or to ease off the monetary policy pedal given the slowing growth patterns.
While this does not directly influence core inflation, other areas can have ramifications. Furthermore, because central banks’ targets are still measured in headline terms, pivoting to a dovish stance will be more difficult the longer inflation is above target. The result is likely to keep US Treasury yields elevated.
Another driver that has likely contributed to the current bond selloff is the unusually high US corporate bond issuance set to hit the market.
The $120 billion in investment-grade issuance anticipated this month is just slightly more than the typical September issuance in recent years. As a result, investors hedge the interest rate risk, putting pressure on US Treasury yields.
The US Treasury yield curve continues rising amid potentially negative inflation and bond issuance data. The 10-year Treasury yield rose about five basis points to 4.30% on Wednesday, adding to its more than 15 basis point gain over the previous two trading days.
This is the largest yield rise over three trading days since early July. In the meantime, real yields were back near their highs, with the 10-year real yield up four basis points to 1.97%, which is just shy of its post-2008 financial crisis closing high of 1.98% on August 21.
With real yields rising further, the US Dollar Index closed at its highest level since March, when Silicon Valley Bank shuttered. This is leading to an increase in FX intervention from China and Japan, whose currencies have suffered sharp losses in recent months.