Alf, if your prognostications are correct, then wouldn't investing in the much overlooked (but somewhat illiquid) 20-Year Treasury Bonds, non-callable Agencies, like the TVAs, and 5-year, non-callable "Brokered" CDs be the easiest and most risk free way for one to make 30% to 40% on his/her money, over the next three years?
Alf.. I am a big fan, and excited to join the premium content. My background is in Equity derivatives, so could you please please please start with a basic primer on things such as OIS, swaption, etc.. These are products that i did not trade previously, and i would a appreciate you gloss over these instruments and others before we jump in the deep end.
I will release a primer on how to use the tools, discussing things like OIS, swaptions etc in details so you guys can get a 101% understanding of what the VAMD and other tools measure and track.
When I read the headline "The Bond Market Is Talking: Are You Listening?", my first thought was that the bond market talked out of its ass a lot this year. In particular, if memory serves, when it completely mispriced terminal rate just a few months ago. It turns out you are kind of saying the same thing: bond market is wrong again.
Now a couple of questions if I may.
1. If you are confident in your prediction of fed aggressively cutting rates in 2023 then why you chose a narrow spread trade instead of simply a long call? And why the maturity is Jun-24, not earlier?
2. Looking at your trade sheet, I don't understand how you made money on the EURUSD trade. You entered at 1.0 and exited at 1.0. Where did the gravy come from?
If I can make a suggestion, your trading sheet needs the "size" column. E.g. your short on SPX where you entered at 4385 and exited at 3750 which is more like 17% profit if you were all in. So the inquiring minds should figure that the bet size was around 25% of your paper capital.
1. Core CPI will have a hard time slowing down below 4% before June 2023 due to how it's calculated. Bond vol is also relatively high, so I prefer a call spread to an outright long position and chose 2024 maturities to get more time on my side for the macro theme to unfold.
2. Sorry, that's because I forgot the decimals. Entered at 1.026 and exited at 0.987. It's all public, that portfolio update was posted on Twitter if you want to look it up.
3. That's correct, and it will be done in my Tactical Trades in 2023. Every trade is sized to lose 2% if I get a 1.5 monthly st.dev. move against me, which meant a 7% move against me in that SPX trade lost me 2%. Hence that 14.5% move from 4385 to 3750 made me roughly 4.5%.
Alf -- New Sub and Huge Fan -- please please could you track Global Liquidity, DXY and other things to help Crypto Hodlers ??? Many of us are ETH-bulls from following Raoul Pal but need more help on understanding global Macro -- TYVM in Advance
I wrote a piece with the top 25 resources I used to learn macro. I also publish a weekly post with all the best articles and podcasts that I listened to.
I'm also big into ETH. Started scooping some now, although I am of course hoping for lower prices.
Hi Alf, thankyou for the commentary, it was insightful as usual, I am in agreement with most of your thesis however, I am also concerned about your inflation back to 2% by late 2023 forecast. Surely with elevated energy prices, relative to where they were in 2019, increased volatility in food prices due to climate change, certain areas of manufacturing being moved away from China eg advanced chips etc it will take longer for inflation to fall to pre covid levels. I understand that with such high debt levels we will all spend less but some of the inflation we are experiencing is supply driven not just demand driven. What factor gives you the most confidence inflation will have a rapid decline in late 23?
Hi Alf, I've now gotten into Treasury Bond Futures (ZBZ2022) for the December contracts. No positions yet, just observing price action w/ your macro knowledge. The idea of flatteners is still a bit difficult to grasp. For example 2s10s flatteners. Does this mean you are short 2 year bonds and long 10 year bonds at the same time? Via a Futures contract or via Put/Call spreads? As always, love these articles and the consistent responses!! Thank you!
Yes that means I'd be short 2y bonds and long 10y bonds. Generally implemented via futures.
In 2023 I am going to precisely define the number of futures contract to buy to adjust for the different duration and sizes in future contracts and make it a perfect curve trade.
First, I have been following you for quite some time and have joined your new 2023 platform. Hopefully, I will be able to adequately understand the technical terms you have used and learn lots of other new things from you in the macro journey ahead.
Next, following your previous reply to rich beachboy, can you elaborate more on why you have chosen the short end instead of the long end? As a novice investor with no experience on call/put, can I simply just buy TLT to reflect the thesis and it also has a better upside then SHY?
Thanks for your detailed reply. For treasuries, another factor that is also at play is the pace of QT. Fed has been ramping the pace from $39.3B in Sep, $70.6B in Oct, and now $85.8B in Nov(so far). Do you think buying long term bonds ETF here is a bit too early? Would you suggest to wait until the pace of QT has been maxed out (perhaps December) then start to increase exposure just in case yields have more upside to go?
Will we be able to see charts of the data in the dashboard ourselves at some point? I would love to be able to see and play around with the series in addition to just seeing the current value.
Alf, isn't there a typo here? It should say 2022 at the end, right?
And when there is less uncertainty around such an important market driver, investors can be marginally more aggressive in taking risks as the bond market behaves better and it reduces some of the explosive volatility it brought to their portfolios in 2023.
I was at your talk in the Netherlands a few weeks ago. Very solid stuff. Thanks for doing all that you're doing. This is insanely important information and everyone needs to know it.
Cutting through to the meat for the average ignorant retail investor (ME), are you saying that you favor the 1-3 year Treasury (SHY or I use VGSH) instead of TLT or similar 20 year+ Treasury Bonds for the next 12-18 months?
This article was chocked full of complex info. Thank you!
Not super easy to say whether the short-end would over or underperform the long-end from here, and as you can see I have no conviction there: no flattening or steepening trades.
I think overall bonds will prove to be a very good asset class next year, and will keep updating you guys with my thoughts on how to play it.
As a retail investor I am a big fan and therefore joined the comprehensive macro platform to learn from the premium content. Must say that I have to crack my brains over the content which of course is mind challenging. I loved the item The Bond Market Is Talking but as more often your tactical ideas are difficult to trade. Nowhere I can find ticker SFRM4. Could you perhaps disclose the Globex Code on this SOFR option which I hope to find on my IBKR platform.
Thanks for the kind words and for becoming a subscriber!
In 2023 every tactical trade idea will have a clear ticker that refers to the listed instrument, so that people can easily find it in their brokerage account and trade it if they want to
Alf, if your prognostications are correct, then wouldn't investing in the much overlooked (but somewhat illiquid) 20-Year Treasury Bonds, non-callable Agencies, like the TVAs, and 5-year, non-callable "Brokered" CDs be the easiest and most risk free way for one to make 30% to 40% on his/her money, over the next three years?
Bonds will undoubdtedly look very attractive if I am right on my main macro thesis.
Alf.. I am a big fan, and excited to join the premium content. My background is in Equity derivatives, so could you please please please start with a basic primer on things such as OIS, swaption, etc.. These are products that i did not trade previously, and i would a appreciate you gloss over these instruments and others before we jump in the deep end.
Hi Ali! Thanks for the kind words.
I will release a primer on how to use the tools, discussing things like OIS, swaptions etc in details so you guys can get a 101% understanding of what the VAMD and other tools measure and track.
When I read the headline "The Bond Market Is Talking: Are You Listening?", my first thought was that the bond market talked out of its ass a lot this year. In particular, if memory serves, when it completely mispriced terminal rate just a few months ago. It turns out you are kind of saying the same thing: bond market is wrong again.
Now a couple of questions if I may.
1. If you are confident in your prediction of fed aggressively cutting rates in 2023 then why you chose a narrow spread trade instead of simply a long call? And why the maturity is Jun-24, not earlier?
2. Looking at your trade sheet, I don't understand how you made money on the EURUSD trade. You entered at 1.0 and exited at 1.0. Where did the gravy come from?
If I can make a suggestion, your trading sheet needs the "size" column. E.g. your short on SPX where you entered at 4385 and exited at 3750 which is more like 17% profit if you were all in. So the inquiring minds should figure that the bet size was around 25% of your paper capital.
Hi Sasha,
1. Core CPI will have a hard time slowing down below 4% before June 2023 due to how it's calculated. Bond vol is also relatively high, so I prefer a call spread to an outright long position and chose 2024 maturities to get more time on my side for the macro theme to unfold.
2. Sorry, that's because I forgot the decimals. Entered at 1.026 and exited at 0.987. It's all public, that portfolio update was posted on Twitter if you want to look it up.
3. That's correct, and it will be done in my Tactical Trades in 2023. Every trade is sized to lose 2% if I get a 1.5 monthly st.dev. move against me, which meant a 7% move against me in that SPX trade lost me 2%. Hence that 14.5% move from 4385 to 3750 made me roughly 4.5%.
Thank you so much for detailed answer, Alf! I should have figured out 2 myself, shame on me and apologies.
1. Your point about bond vol went over my head. I mean, in general of course but specifically SOFR seems to jump when Fed moves rates but otherwise stays flat. I looked here: https://www.investing.com/rates-bonds/three-month-sofr-futures-historical-data
I have a strong feeling that I'm missing something...
3. Got it. Are these choices (2% and 1.5 stds) based on some kind of backtesting that you or other people performed or just general common sense?
Alf -- New Sub and Huge Fan -- please please could you track Global Liquidity, DXY and other things to help Crypto Hodlers ??? Many of us are ETH-bulls from following Raoul Pal but need more help on understanding global Macro -- TYVM in Advance
Of course, Chug. Macro is very important for crypto. Thanks for being a sub!
I wrote a piece with the top 25 resources I used to learn macro. I also publish a weekly post with all the best articles and podcasts that I listened to.
I'm also big into ETH. Started scooping some now, although I am of course hoping for lower prices.
https://theunhedgedcapitalist.substack.com/p/my-favorite-25-investing-podcasts
Hi Alf, thankyou for the commentary, it was insightful as usual, I am in agreement with most of your thesis however, I am also concerned about your inflation back to 2% by late 2023 forecast. Surely with elevated energy prices, relative to where they were in 2019, increased volatility in food prices due to climate change, certain areas of manufacturing being moved away from China eg advanced chips etc it will take longer for inflation to fall to pre covid levels. I understand that with such high debt levels we will all spend less but some of the inflation we are experiencing is supply driven not just demand driven. What factor gives you the most confidence inflation will have a rapid decline in late 23?
Hi Sue! Have a look at the article I released yesterday for an assessment of cyclical vs structural inflation drivers.
The drivers you correctly mention will impact trend inflation levels over the next decade.
But the inflation cycle in late 2023 / early 2024 will be driven by the rapid drop in demand that a recession will cause.
Hi Alf, I've now gotten into Treasury Bond Futures (ZBZ2022) for the December contracts. No positions yet, just observing price action w/ your macro knowledge. The idea of flatteners is still a bit difficult to grasp. For example 2s10s flatteners. Does this mean you are short 2 year bonds and long 10 year bonds at the same time? Via a Futures contract or via Put/Call spreads? As always, love these articles and the consistent responses!! Thank you!
Yes that means I'd be short 2y bonds and long 10y bonds. Generally implemented via futures.
In 2023 I am going to precisely define the number of futures contract to buy to adjust for the different duration and sizes in future contracts and make it a perfect curve trade.
Hi Alf,
Every segment of your dashboard has a column with the variation and which has a color-coding mechanism.
Compared to what period is that variation? Compared with last week, with last month, is it YTD?
Sorry if it is a stupid question.
Never a stupid question, Radu!
The dashboard will have daily, weekly, monthly and quarterly time frames to choose from.
I am trying to make it even more flexible than that, working on it :)
Hey Alf,
Really interested in your paid products, could you give us a tour?
I'm a retail investor and trying to up my game but would like a preview of what im getting
Hi!
On this page you can see exactly what each tier offers: https://www.themacrocompass.com/our-products/
Hi Alf,
First, I have been following you for quite some time and have joined your new 2023 platform. Hopefully, I will be able to adequately understand the technical terms you have used and learn lots of other new things from you in the macro journey ahead.
Next, following your previous reply to rich beachboy, can you elaborate more on why you have chosen the short end instead of the long end? As a novice investor with no experience on call/put, can I simply just buy TLT to reflect the thesis and it also has a better upside then SHY?
Thanks for becoming a subscriber!
Overall, I think the bond market will deliver good returns in 2023.
In the first half, it might be the 10y+ part of the curve does better as Powell stubbornly keeps Fed Funds high for as long as he can.
Later on, the front-end will perform better on a volatility-adjusted basis.
Hi Alf,
Thanks for your detailed reply. For treasuries, another factor that is also at play is the pace of QT. Fed has been ramping the pace from $39.3B in Sep, $70.6B in Oct, and now $85.8B in Nov(so far). Do you think buying long term bonds ETF here is a bit too early? Would you suggest to wait until the pace of QT has been maxed out (perhaps December) then start to increase exposure just in case yields have more upside to go?
Will we be able to see charts of the data in the dashboard ourselves at some point? I would love to be able to see and play around with the series in addition to just seeing the current value.
Absoluely yes, Michael!
You'll be able to chart, compare, and play around interactively with all data series :)
Tyvm 🙏
Hi Alf. Thank you so much for responding back. I will check them out! God's blessings upon you and your family. Peter
Alf, isn't there a typo here? It should say 2022 at the end, right?
And when there is less uncertainty around such an important market driver, investors can be marginally more aggressive in taking risks as the bond market behaves better and it reduces some of the explosive volatility it brought to their portfolios in 2023.
Correct, great eye for the typo!
Thank you Alfonso! Very cool analysis!
Welcome, Josef!
I was at your talk in the Netherlands a few weeks ago. Very solid stuff. Thanks for doing all that you're doing. This is insanely important information and everyone needs to know it.
Cutting through to the meat for the average ignorant retail investor (ME), are you saying that you favor the 1-3 year Treasury (SHY or I use VGSH) instead of TLT or similar 20 year+ Treasury Bonds for the next 12-18 months?
This article was chocked full of complex info. Thank you!
Thanks for the kind words, Douglas!
Not super easy to say whether the short-end would over or underperform the long-end from here, and as you can see I have no conviction there: no flattening or steepening trades.
I think overall bonds will prove to be a very good asset class next year, and will keep updating you guys with my thoughts on how to play it.
As a retail investor I am a big fan and therefore joined the comprehensive macro platform to learn from the premium content. Must say that I have to crack my brains over the content which of course is mind challenging. I loved the item The Bond Market Is Talking but as more often your tactical ideas are difficult to trade. Nowhere I can find ticker SFRM4. Could you perhaps disclose the Globex Code on this SOFR option which I hope to find on my IBKR platform.
Hi Richard,
Thanks for the kind words and for becoming a subscriber!
In 2023 every tactical trade idea will have a clear ticker that refers to the listed instrument, so that people can easily find it in their brokerage account and trade it if they want to