Thank you Alf ! I really love your work. Would you explain more why 2-5y Treasuries have better values than US Treasuries of other years of maturity? UST 1 year yield now lies at 4.67% and 6 months now 4.74% why 2-5y US Treasuries are better investment? Thank you very much.
Hi Alf! That being the case, would it not be a good idea to stay in 3 to 6 month treasuries ($SGOV, for instance) for the first quarter or two and then, after all expected hikes are in and pausing is advanced, buy a 2-5y US Gov. Bond ETF? Thank you!
While I appreciate the sentiment, don't fight the Fed, I wonder to what extent the Fed is still fighting inflation vs trying to repair a financial market (really talking about the plumbing here) that remains broken following a decade+ of experimental policy. He is indirectly forcing a deleveraging of the system...and there will be collateral damage.
Too many equity investors got used to the old paradigm of QE & ZIRP, and assume that while the Fed may be tight now, all that will matter is that a future "pivot" occurs and everything will once again be rosy for equities. Wrong. The paradigm has changed. The Fed wants to bring pain and will bring PLENTY of pain by stubbornly continuing to tighten amidst declining: M2; durables prices; market rents; freight rates; and oil prices.
The bond market correctly understands what this means: lower inflation AND a recession. Equities should not be trading well above their historical multiples given such an outlook.
There should still be a few sectors in equities that will do well, though, but I'll pass until there is a proper environment for stocks, and that may take a while.
If a deeper recession than anticipated by the market is likely, should an investor not just simply (i) short equities and/or (ii) buy long duration bonds?
A false rally (correction up) in the USD in Q1 could offer a good entry before a Q2 rally, for instance. :-) ...Although markets aren't in the habit of offering what people want.
I would like to ladder the 2yr 5yr treasury strategy but which spread on the JUN 24 Eurodollar call would you recommend. Trigger happy :-) and do not want to wait until January. Please elaborate Alf and many thx in advance.
Hi Richard. Regarding bonds, have you picked an instrument for this? Personally, I am looking at the iShares 1-3yr Treasury Bond ETF ($SHY), but I haven't delved into my options and alternatives. I am just concerned that the downtrend is still pretty solid towards a discount and I'm not a huge fan of picking bottoms (or tops for the yield). Cheers!
Hi Miguel, I am not much in favor of an ETF because of the ongoing duration so I prefer to buy the treasuries, I am looking to ladder below mentioned treasuries and hedge against the EURO:
Cusip Par Price Coupon Mat date Mat date % Dur to mat
What puzzled me was Powell's comment in the press conference about positive real rates in everything but the front end of the yield curve. Is that because the 4 and 8 week T Bills are below the new Fed Funds rate range of 4.25-4.5% (and the 13 week T Bill is just within the the range)?
think the wrong file is connected to this link. this is last weeks "how much of a recession priced in "
I corrected the audio file. Sorry for the mistake, try to take a listen now :)
Thank you Alf ! I really love your work. Would you explain more why 2-5y Treasuries have better values than US Treasuries of other years of maturity? UST 1 year yield now lies at 4.67% and 6 months now 4.74% why 2-5y US Treasuries are better investment? Thank you very much.
That's because a fast cutting cycle from the Fed gets priced in the most aggressive in 2-5y bonds.
30y bonds have more duration of course, so even if in bps they rally less they will be rallying more in % terms.
But buying a higher amount (in risk-equivalent terms) of 2-5y bonds is best if you are trying to bet on a cutting cycle from the Fed.
Hi Alf! That being the case, would it not be a good idea to stay in 3 to 6 month treasuries ($SGOV, for instance) for the first quarter or two and then, after all expected hikes are in and pausing is advanced, buy a 2-5y US Gov. Bond ETF? Thank you!
While I appreciate the sentiment, don't fight the Fed, I wonder to what extent the Fed is still fighting inflation vs trying to repair a financial market (really talking about the plumbing here) that remains broken following a decade+ of experimental policy. He is indirectly forcing a deleveraging of the system...and there will be collateral damage.
Good summary, Alfonso!
Too many equity investors got used to the old paradigm of QE & ZIRP, and assume that while the Fed may be tight now, all that will matter is that a future "pivot" occurs and everything will once again be rosy for equities. Wrong. The paradigm has changed. The Fed wants to bring pain and will bring PLENTY of pain by stubbornly continuing to tighten amidst declining: M2; durables prices; market rents; freight rates; and oil prices.
The bond market correctly understands what this means: lower inflation AND a recession. Equities should not be trading well above their historical multiples given such an outlook.
Totally agree!
There should still be a few sectors in equities that will do well, though, but I'll pass until there is a proper environment for stocks, and that may take a while.
Great stuff. Do you mind clarifying how you calculate the market expected CPI expected forward over the short horizons under 1 year?
I calculate forward inflation from inflation swaps
If a deeper recession than anticipated by the market is likely, should an investor not just simply (i) short equities and/or (ii) buy long duration bonds?
This pretty much worked in every recession but of course there are nuances, timing and risk management to consider
Incredible write up and incredible to see this all unfold right in front of us!
Thank you!
Great, Alf! Do you think gold will act in a risk-on fashion or be an adequate relative safety asset? She's a tricky beast that metal.
I expect gold to start doing well from Q2-2023
A false rally (correction up) in the USD in Q1 could offer a good entry before a Q2 rally, for instance. :-) ...Although markets aren't in the habit of offering what people want.
👍Good morning from the East coast of the US.
Morning Woody!
I would like to ladder the 2yr 5yr treasury strategy but which spread on the JUN 24 Eurodollar call would you recommend. Trigger happy :-) and do not want to wait until January. Please elaborate Alf and many thx in advance.
I have Jun 2024 98.5-99.0 call spreads u
Hi Richard. Regarding bonds, have you picked an instrument for this? Personally, I am looking at the iShares 1-3yr Treasury Bond ETF ($SHY), but I haven't delved into my options and alternatives. I am just concerned that the downtrend is still pretty solid towards a discount and I'm not a huge fan of picking bottoms (or tops for the yield). Cheers!
Hi Miguel, I am not much in favor of an ETF because of the ongoing duration so I prefer to buy the treasuries, I am looking to ladder below mentioned treasuries and hedge against the EURO:
Cusip Par Price Coupon Mat date Mat date % Dur to mat
912796ZD4 100,00 95,75 0,000% 30/11/23 4,53% 0,96
912828YY0 100,00 95,33 1,750% 31/12/24 4,13% 2,05
9128283P3 100,00 96,25 2,250% 31/12/24 4,16% 2,05
91282CBC4 100,00 90,09 0,375% 31/12/25 3,82% 3,05
9128285T3 100,00 96,42 2,625% 31/12/25 3,87% 3,05
91282CDQ1 100,00 90,73 1,250% 31/12/26 3,71% 4,05
912828YX2 100,00 92,66 1,750% 31/12/26 3,70% 4,05
91282CBB6 100,00 86,23 0,625% 31/12/27 3,60% 5,05
Thank you Alf
Welcome, Ali!
What puzzled me was Powell's comment in the press conference about positive real rates in everything but the front end of the yield curve. Is that because the 4 and 8 week T Bills are below the new Fed Funds rate range of 4.25-4.5% (and the 13 week T Bill is just within the the range)?
He wants positive real rates (> 1.50%) across the entire curve
Why don’t you consider long term corporate or government bonds (VCLT and TLT)?
I do :) I will be releasing my asset allocation ETF-only portfolio in 2023 on The Macro Compass platform
Thanks Alf!
Welcome!
For sure the bond market thinks the fed is completely full of shit. And very probably rightly so.
Thank you Alf!
Welcome, Chris!