ez producer prices are a function of commodities consumer
TRANSCRIPT
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Transatlantic Inflation Impulse While the US inflation outlook is getting lots of attention, there’s a similar dynamic playing out in Eu-
rope. Producer prices have surged to record highs on a YoY basis, though commodity prices suggest
those will start to slow soon. Consumer prices are less consistently influenced by commodities, with an
r-squared about half as large as that of PPI relative to commodity prices in EUR.
Using a simple model of unemployment rates, commodity prices, and consumer price expectations
from monthly European Commission consumer confidence surveys, we can generate a respectable
model for Eurozone harmonized index of consumer prices (HICP) inflation. That model (bottom left
chart) suggests prices will not peak for at least another three months, and perhaps longer. With that in
mind, the fact that 10y Eurozone HICP swaps closed above 2% for the first time since 2013 shouldn’t be
much of a surprise. Like US inflation swaps, Eurozone consumer prices derivatives are overly-correlated
to oil price level changes, but we can still see an impulse in relative inflation. The recent uptick in infla-
tion is arguably even more severe across the Atlantic than in the US, despite a very different COVID
policy response.
EZ Producer Prices Are A Function Of Commodities Consumer Prices Are A Less Direct Commodity Story
Eurozone Inflation Likely Has Yet To Peak EZ HICP Swaps: Finally Back Over 2%, More To Come?
-10
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0
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-20
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0
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30
40
50
60 Bloomberg Commodity Spot Index, EUR,Monthly Avg, YoY % Change, Adv 3m
Eurozone PPI YoY
-1
0
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-40
-30
-20
-10
0
10
20
30
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60 Bloomberg Commodity Spot Index, EUR,Monthly Avg, YoY % Change, Adv 3m
Eurozone HICP YoY
R-Squared = 0.64 R-Squared = 0.34
-1
0
1
2
3
4
Eurozone HICP YoY
Modelled
R-Squared = 0.77
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
EZ 10y Inflation Swap
EZ 10y Inflation Swap - US10y Inflation Swap
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Treasury Yields, Prices, and 30 Year Fixed Mortgage Rate
National Average 30 Year Mortgage Rate (%)
30 Year Treasury Future (Price, Roll Adjusted) 30 Year Treasury Bond (Yield, %)
2 Year Treasury Future (Price, Roll Adjusted) 2 Year Treasury Note (Yield, %)
10 Year Treasury Future (Price, Roll Adjusted) 10 Year Treasury Note (Yield, %)
5 Year Treasury Future (Price, Roll Adjusted) 5 Year Treasury Note (Yield, %)
109.85
109.90
109.95
110.00
110.05
110.10
110.15
110.20
110.25
2.7
2.8
2.9
3.0
3.1
3.2
3.3
3.4
200 DMA
0.09
0.11
0.13
0.15
0.17
0.19
0.21
0.23
0.25
0.27
0.29
200 DMA50 DMA
122.0
122.5
123.0
123.5
124.0
124.5
125.0
125.5
200 DMA
50 DMA
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
200 DMA
50 DMA
129
130
131
132
133
134
135
136
137
200 DMA
50 DMA
0.60
0.80
1.00
1.20
1.40
1.60
1.80
200 DMA
50 DMA
170
180
190
200
210
220
200 DMA
50 DMA
1.30
1.50
1.70
1.90
2.10
2.30
2.50
200 DMA
50 DMA
50 DMA
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Money Markets, ETFs and Trade of the Week
While a further acceleration in Eurozone realized
inflation and inflation pricing as discussed on page
one doesn’t seem like a good thing for bonds, we
note that some of the price action in bund futures is
starting to turn less negative.
As shown in the chart above, despite the very strong
downtrend since this summer’s yield lows (price
highs), measures of price momentum appear to be
starting to diverge. Prices are narrowing within their
trading range, retreating from their >2 standard de-
viations oversold reading a week ago. The 14-day
RSI is also starting to diverge in a similar pattern.
Behaviorally, this feels like it makes sense: taper and
hike pricing is reaching a fever pitch amidst soaring
energy prices, but risk assets are starting to react
and historically the end of Fed purchases has led to
a bond rally rather than decline.
Fid. Cash 0.01 0.000 Fed Funds 0.080 0.000
Van. Prime 0.01 0.010 O/N Libor 0.070 -0.002
Blackrock Cash 0.02 0.020 1M Libor 0.086 0.002
Fid. Munis 0.01 0.000 3M Libor 0.124 -0.008
Schwab Govt 0.01 0.000 4 Wk T Bill 0.096 0.063
Schwab Prime 0.03 0.000 3M T Bill 0.036 0.005
JPM Prime 0.01 0.000 6M T Bill 0.051 0.005
State St Gov't 0.03 0.000 1Y T Bill 0.089 0.020
GS MMkt 0.08 -0.001 Repo 0.045 0.005
Money Market Rates
Money Market Funds Key Short Term Rates
Yield 5 Day YTD
Ticker Name Price (%) TR (%) TR (%)
AGG Core US Bond Mkt 114.65 1.88 -0.02 -1.67
BIL 1-3 MoT Bill 91.45 n/a -0.01 -0.08
BIV Vang. Intrmed. 89.34 1.86 0.07 -2.04
BKLN Senior Loans 22.12 3.01 -0.23 1.63
BLV Vang. Long Term 102.14 2.80 -0.13 -4.51
BND Tot Bond Mkt 85.36 1.83 0.02 -1.79
BOND PIMCO Tot Ret 110.30 2.61 -0.06 -0.60
BSV Barc. Short Term 81.86 1.07 -0.02 -0.37
EDV Long Dur. Trsy 135.28 2.09 0.12 -9.80
EMB JPM EM Bonds 109.02 3.80 -0.66 -3.25
FLOT Floating Rate 50.79 0.36 -0.07 0.47
HYG iBoxx HY 86.88 4.00 -0.49 2.57
IEF 7-10 Yr Bonds 115.16 0.84 0.14 -3.43
IEI 3-7 Yr Trsy 130.10 0.68 0.07 -1.64
IGSB 1-3 Yr Corp. 54.55 1.52 0.01 0.11
JNK Barc. High Yield 108.51 4.29 -0.55 2.83
LQD iBoxx Invest. Grade 132.98 2.31 -0.11 -2.06
MBB MBS 108.12 0.21 0.10 -0.80
MINT Short Term Corp. 101.90 0.41 0.03 0.19
MUB Munis 115.93 1.80 -0.02 0.28
PFF Preferreds 38.26 4.66 -1.39 2.93
PGF Financial Preferreds 18.66 4.60 -1.49 0.61
PGX Preferred Port. 14.85 4.79 -1.30 0.92
SHM Short Term Munis 49.36 0.77 -0.02 -0.25
SHV Short Term Trsy 110.46 n/a 0.00 -0.07
SHY 1-3 Yr Trsy 86.11 0.15 -0.02 -0.15
SNLN iBoxx Sen Loan 16.05 3.67 -0.28 2.07
SPSB Barc. Short Term 31.22 0.92 -0.05 0.24
STPZ PIMCO 1-5 Yr TIPS 54.85 3.06 0.31 4.54
TBF Short 20+ Yr Trsy 16.64 n/a -0.18 5.45
TBX Short 7-10 Yr Trsy 24.44 n/a -0.16 2.22
TIP TIPS 127.96 4.05 0.56 3.76
TLH 10-20 Yr Trsy 146.93 1.62 0.08 -6.71
TLT 20+ Yr Trsy 144.32 1.52 0.11 -7.43
VCLT Long Term Corp 105.53 3.15 -0.27 -2.76
VCSH Vang. Short Term 82.29 1.57 -0.02 0.03
Key Fixed Income ETFs
German Bund Future: Roll-Adjusted (EUR)
167
168
169
170
171
172
173
174
175
176
50-DMA
200-DMA
167
168
169
170
171
172
173
174
175
176
-4
-2
0
2
4Overbought
Oversold
SD From 50-DMA
20
30
40
50
60
70
80 OverboughtOversold14-Day RSI
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Treasury Yield Curve: Current vs 3 Months Prior, w/ BPs Change
Bunds Yield Curve: Current vs 3 Months Prior, w/ BPs Change
Eurodollar Yield Curve: Current vs 3 Months Prior, w/ BPs Change
Inflation Curve: Current vs 3 Months Prior, w/ BPs Change
Bespoke Global Yield Curve: Current vs 3 Months Prior, w/ BPs Change
+2.79
+8.54
+13.86
+20.41
+21.96
+19.91
+12.83
0
40
80
120
160
200
240
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
10/6/2021
7/7/2021
-3.1 -2
+0.1
+4.1
+9
+10.5
+11
-100
-80
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-40
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0
20
40
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
10/5/2021
7/7/2021
+5
-4
+3
+19
+18
+22.5
+32
+23.5
+24.5+25
+25
0
20
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80
100
120
140
160
3 Mo 6 Mo 9 Mo 12 Mo 15 Mo 18 Mo 21 Mo 24 Mo 27 Mo 30 Mo 33 Mo
10/6/2021
7/7/2021
-3.61
+10.51
+12.62
+15.71+25.63
+16.92
+11.03
220
240
260
280
300
320
340
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
10/6/2021
7/7/2021
+12.21
+10.37
+10.6
+12.93
+13.26
+15.26
+11.57
150
170
190
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230
250
270
290
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330
350
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
10/6/2021
7/7/2021
Benchmark Yield Curves Given the chaos in natural gas markets today
across the Atlantic, it’s somewhat surprising that
US interest rates have a bull-flattening bias, but
that appears to be the case. 10 year yields have
not made a new high versus their 9/28 peak, let
alone March levels, and 5 year yields are also be-
low their highs in late September.
SOFR futures for the December 2022 3 month
period remain near recent lows, and the trend of
steepening from December 2022 to December
2023 contracts (representing a more hikes in
2023) has continued. In general, the market isn’t
pricing anything dramatic, with slightly more than
1 hike next year and slightly more than 2 in 2023.
Eurozone credit markets have been widening
steadily with high yield OAS moving from around
220 bps in mid-September to more than 263 bps
today. Sovereign spreads haven’t participated,
with the average peripheral 10y yield trading
about 68.5 bps over bunds, the exact same place
they did two months ago.
Oil’s decline today is clearly taking some of the
pressure off of breakevens: the spread between
10y nominals and TIPS closed at five month highs
yesterday, up 5.8 bps to 2.46%, but is down today
as WTI falls 2% from the highest close since No-
vember of 2014 yesterday. A supply response is
clearly underway as production and rig counts
accelerate from 2020 lows.
With the Bank of Kora, Norgesbank, and RBNZ all
raising rates along with EM central banks like the
Banxico and CNB, global short-term nominal
yields have risen steadily over the last few
months, but longer-term yields are also making
new highs weighted by GDP of each local market.
We’re also starting to see some 2s10s steepening
as shown on the next page.
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Bespoke Global Yield Curve: 2 Year Bespoke Global Yield Curve: 5 Year
Bespoke Global Yield Curve: 10 Year Bespoke Global Yield Curve: 30 Year
Bespoke Global Yield Curve: 2s10s Bespoke Global Yield Curve: 5s30s
110
160
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310
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Curves, Spreads and Total Returns
High Yield Corporates
Municipal Bonds
Mortgage Backed Securities
Emerging Markets2 Year vs 5 Year
5 Year vs 10 Year
10 Year vs 30 Year
2 Year vs 10 Year
10 Year Italian BTP (vs German Bund, not Treasury)
Municipal Bonds
10 Year Swap
High Yield Corporates
3 Month vs 2 Year 10 Year German Bund Long Dated Treasuries
Treasury Curves (BPs) Spreads vs Treasury (BPs) Total Return Over Past Year (BPs)
0
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Page 2: These charts track the performance of the yield of Treasury bonds and their price in the futures
market over the past year. Also presented is the National Average 30 Year Fixed Rate Mortgage ac-
cording to bankrate.com’s index of mortgage lending.
Page 3: At upper left is a table summarizing the level and change of short term interest rates. Money
market fund rates represent the highest yields available to large money market fund investors for a
spectrum of funds. Next to the money market fund rates are benchmark short-term interest rates.
Each change represents the change in yield over the last five days. At lower left we show a grid of ma-
jor fixed income ETFs and include yield, five day change, and year to date total return for each ETF.
Page 5: Benchmark yield curves are “risk free” interest rates that other fixed income securities trade
relative to. All yield curves are expressed in basis points. Three month changes in the curves are
shown in basis points at each point on the curve. The Bespoke Global Yield Curve is a Purchasing Pow-
er Parity Gross Domestic Product-weighted average of nominal yields for the world’s fifteen largest
economies. It is graphed versus the yield curves for the United States and Germany, the two most-
followed global benchmarks.
Page 5: Time series charts for the yields of the Bespoke Global Yield curve, presented in basis points.
Page 6: The Treasury curve charts in column one show the difference in yield between the second se-
curity listed and the first. For instance, if 2 Year Treasuries currently yield 0.45% and 5 Year Treasuries
yield 1.45%, the “curve” between 2 Years and 5 Years is 1.00%. Typically, a flattening yield curve (a
chart of the curve moving downwards, or the difference between the two yields narrowing) is an indi-
cation of economic headwinds, but the absolute level of the curve between Treasuries can be as im-
portant as the change in that curve.
The spreads column shows yield differences between Treasuries and other important sectors of the
fixed income market. Each spread is expressed as the yield on the bond in question. For instance, if
Italian 10 Year government bonds or “BTPs” yield 3.50% and 10 Year Treasuries yield 3.00%, the spread
between them is 0.50%. This spread can be negative. All else being equal, a positive spread to Treas-
uries indicates increased credit risk. But when spreads are measured between two different currencies
(for instance, between German Bunds and Treasuries), a negative spread to Treasuries can be caused
by different inflation expectations, real growth rates or other differences between the currencies in
question.
Finally, the total return indices in the right hand column show the total return for Bank of America
Merrill Lynch bond market indices in each sector listed. Total return shows both coupon income and
price appreciation for each basket of bonds. These total returns are graphed as total return over the
prior year, starting from zero as of one year ago today.
The Fixed Income Report Explained