Mostly, the labor market to show actual weakness and core inflation to slow down - I expect both to happen in a few months at the latest.
This should somehow slow the USD appreciation, hence stopping the reverse FX war we are seeing and as the Fed keeps pinning the front-end, the back-end will invert and rally further.
Once again, thanks very much for all the hard work and great to see you are getting the recognition you deserve (saw you on Dan Nathan's show with Danny Moses)! So many analysts seem to parrot the mainstream narrative, but you always provide data driven insight that sets you apart. The graphs you present re risk premium are telling, though I'm still bewildered that equities continue to "hold on" (e.g. who on earth is buying home builders now and what the hell are they thinking???). Abbi cura di te amico!
Great read as always. Yield curve inverted further and the short term T-Bills yield is higher than the long Bond. why anyone wants to hold/buy the long Bond, for price appreciation ? if for the price appreciation, when the Fed cut rates in the future, should not the short term T-Bills appreciate much more? can anyone explain it here? thanks.
Pension funds, banks and insurance companies need long bonds to hedge the interest rate risk embedded in their liabilities (think pension contributions or life insurances: very long dated liabilities).
Thank you Alf for the explanation. that makes sense for financial institutions to buy long bonds. so from the interest rate perspective, it makes no sense to buy long bond as the shorter end Treasury yield is higher. but from price appreciation perspective, the longer bond may appreciate more when FED pivots. right?
I am trying to understand the correlation between the Federal Fund Rate and Treasury fluctuation. like when FFR up/down 100 points, how much will 1year/2year/3year/5year/10year/20year/30year the Treasury be up/down accordingly. or there are no correlation at all? Thanks for your time.
Quite an education in every release!!. I keep going back to the old releases to comprehend what is said vs what is happening!
As I was looking at the calculations in the Portfolio updates, I could not understand "How the risk adjusted P&L being calculated" Would appreciate if any one can explain taking a single trade that is already closed
My main confusion is around the choice of instrument I guess. The instruments available (Options/Futures) come with leverage and the 2% would get magnified in either direction
Alf what do you think of Joseph Wang's thesis that Treasury rates are more supply/demand driven so with the Fed out of the market and a lot of supply coming online next year without the usual buyers like hedge funds/banks? If I understood him correctly, this could lead to higher long term rates, unless the Treasury implements a "buyback" concept Joseph said they've been discussing, using short term treasuries to pay for buying back longer dated maturities. Again, if I understood Joseph correctly the buyback idea is in the event there is a liquidity problem, so the Treasury can "ride to the rescue".
I will talk with Joseph live on Blockworks this week about FX intervention and monetary plumbing and we'll cover this too - make sure you don't miss that!
I actually wrote a short piece about this, basically summarizing Joseph's idea. I think you are correct, the buyback is a way to inject desperately needed bills while taking less useful bonds out of the market.
Maybe you know this already, but it's a great example of how clueless our financial officials are. In the 2018 repo crisis, the Fed actually started buying lots of bills and removing them from the financial system, just when they were most needed! It was a huge policy blunder and they did eventually figure that out. Still, shows how much (or little) our dear leaders actually know about the intricacies of the system that they're tasked with managing.
Thank you for your work. I just don’t see how Long bonds (TLT) will do well over the next few months as the Fed raises to 4.5-5%. Yes yields typically fall when PMIs weaken but yields curve also get flatter over time. The feds actions may have more influence here than an economic slowdown/recession. Why do you think otherwise in this case?
Thanks Alf, it would be great if you can address the likelihood of a Fed pivot in the event of systemic failure (see, eg @LukeGromen), caused by the Fed (and other CBs) raising rates (despite record levels of sovereign, corporate and personal debt) and/or for some other reason eg corporate bond crisis, USDJPY meltdown, GBPUSD crisis etc.
I did not quite comprehend all the information. I have only recently become passionate about economy and I don't have the necessary experience, but I am motivated to keep learning and hopefully become as good as you to view the markets.
Alfonso what do you think about the following statements:
To help to prop up the yen, the BOJ sells Treasuries for USD, and then sells that USD for yen (JPY).
If many central banks are selling Treasuries in order to help defend their currencies, it makes the Fed's job of shrinking its balance sheet that much more difficult.
If the USD remains too strong, Japan and the Europeans may be forced by domestic pressures to buy energy from Putin using JPY and EUR. This would have major implications for geopolitical alliances, as well as energy markets.
Further, if Japan and China keep selling Treasuries, the Fed might be forced to step in and restore stability and liquidity to the Treasury markets much sooner than people expect.
That would mark the end of QT (quantitative tightening, where the Fed shrinks its balance sheet) and the beginning of a new round of QE (quantitative easing, where the Fed buys Treasuries and adds them to its balance sheet).
So what’s the trigger for buying the rest of your TLT allocation?
Good question.
Mostly, the labor market to show actual weakness and core inflation to slow down - I expect both to happen in a few months at the latest.
This should somehow slow the USD appreciation, hence stopping the reverse FX war we are seeing and as the Fed keeps pinning the front-end, the back-end will invert and rally further.
For now, watching from the outside.
Will let you guys know if I accumulate more.
Once again, thanks very much for all the hard work and great to see you are getting the recognition you deserve (saw you on Dan Nathan's show with Danny Moses)! So many analysts seem to parrot the mainstream narrative, but you always provide data driven insight that sets you apart. The graphs you present re risk premium are telling, though I'm still bewildered that equities continue to "hold on" (e.g. who on earth is buying home builders now and what the hell are they thinking???). Abbi cura di te amico!
I totally share your feelings, James!
Great read as always. Yield curve inverted further and the short term T-Bills yield is higher than the long Bond. why anyone wants to hold/buy the long Bond, for price appreciation ? if for the price appreciation, when the Fed cut rates in the future, should not the short term T-Bills appreciate much more? can anyone explain it here? thanks.
Pension funds, banks and insurance companies need long bonds to hedge the interest rate risk embedded in their liabilities (think pension contributions or life insurances: very long dated liabilities).
Thank you Alf for the explanation. that makes sense for financial institutions to buy long bonds. so from the interest rate perspective, it makes no sense to buy long bond as the shorter end Treasury yield is higher. but from price appreciation perspective, the longer bond may appreciate more when FED pivots. right?
I am trying to understand the correlation between the Federal Fund Rate and Treasury fluctuation. like when FFR up/down 100 points, how much will 1year/2year/3year/5year/10year/20year/30year the Treasury be up/down accordingly. or there are no correlation at all? Thanks for your time.
Quite an education in every release!!. I keep going back to the old releases to comprehend what is said vs what is happening!
As I was looking at the calculations in the Portfolio updates, I could not understand "How the risk adjusted P&L being calculated" Would appreciate if any one can explain taking a single trade that is already closed
Hi!
So let's take the Russell short opened on Jan 2nd and closed on March 29th.
226.5 entry, 210 close: 7.3% move.
The size of the position was built as such that a 7.3% move (1 monthly volatility) could make or lose 2% of my capital.
Hence the P&L was 2%.
Thanks so much !
My main confusion is around the choice of instrument I guess. The instruments available (Options/Futures) come with leverage and the 2% would get magnified in either direction
Regards
Don’t get married to a long bond. Date a short Bill. Then date another next month.
Yep, sometimes that's the case :)
Thanks Alf. I do appreciate your hard work. Thanks again. :)
Thank you, Chris!
Alf what do you think of Joseph Wang's thesis that Treasury rates are more supply/demand driven so with the Fed out of the market and a lot of supply coming online next year without the usual buyers like hedge funds/banks? If I understood him correctly, this could lead to higher long term rates, unless the Treasury implements a "buyback" concept Joseph said they've been discussing, using short term treasuries to pay for buying back longer dated maturities. Again, if I understood Joseph correctly the buyback idea is in the event there is a liquidity problem, so the Treasury can "ride to the rescue".
Hi James!
I will talk with Joseph live on Blockworks this week about FX intervention and monetary plumbing and we'll cover this too - make sure you don't miss that!
Thanks Alf! I'm subscribed to Blockworks on YouTube, so I will definitely watch that interview.
I actually wrote a short piece about this, basically summarizing Joseph's idea. I think you are correct, the buyback is a way to inject desperately needed bills while taking less useful bonds out of the market.
https://theunhedgedcapitalist.substack.com/p/the-treasury-is-going-to-buy-treasuries
Maybe you know this already, but it's a great example of how clueless our financial officials are. In the 2018 repo crisis, the Fed actually started buying lots of bills and removing them from the financial system, just when they were most needed! It was a huge policy blunder and they did eventually figure that out. Still, shows how much (or little) our dear leaders actually know about the intricacies of the system that they're tasked with managing.
Thank you for your work. I just don’t see how Long bonds (TLT) will do well over the next few months as the Fed raises to 4.5-5%. Yes yields typically fall when PMIs weaken but yields curve also get flatter over time. The feds actions may have more influence here than an economic slowdown/recession. Why do you think otherwise in this case?
Hi David!
I explained my rationale here: https://themacrocompass.substack.com/p/time-for-bonds#details
I am very patient about this though, will let you guys know when/if I add.
Thank you for sharing your work Alf, I just recently found you after watching an interview you did with Kitco.
It's interesting to hear the fed funds rate will continue to climb for a while. Is there a practical upper limit it can reach with US debt so high?
Thank you!
Well, things are already breaking as we speak - not only the public sector but also the private sector is quite leveraged.
The issue is that with these levels of CPI the hurdle for the Fed to stop is very high.
Very good article Alf. Really appreciated your portfolio update.
Please include that with most, if not all, articles.
Thank you
I will: thanks, Jeffrey!
Thanks Alf, it would be great if you can address the likelihood of a Fed pivot in the event of systemic failure (see, eg @LukeGromen), caused by the Fed (and other CBs) raising rates (despite record levels of sovereign, corporate and personal debt) and/or for some other reason eg corporate bond crisis, USDJPY meltdown, GBPUSD crisis etc.
Yep, we can chat about the systemic triggers for a pivot in one of my next articles.
I'm always sharing your work. Thank you for these weekly releases. I'm always looking forward to them!
Thank you!
I did not quite comprehend all the information. I have only recently become passionate about economy and I don't have the necessary experience, but I am motivated to keep learning and hopefully become as good as you to view the markets.
Keep following The Macro Compass and you'll get there :)
Alfonso what do you think about the following statements:
To help to prop up the yen, the BOJ sells Treasuries for USD, and then sells that USD for yen (JPY).
If many central banks are selling Treasuries in order to help defend their currencies, it makes the Fed's job of shrinking its balance sheet that much more difficult.
If the USD remains too strong, Japan and the Europeans may be forced by domestic pressures to buy energy from Putin using JPY and EUR. This would have major implications for geopolitical alliances, as well as energy markets.
Further, if Japan and China keep selling Treasuries, the Fed might be forced to step in and restore stability and liquidity to the Treasury markets much sooner than people expect.
That would mark the end of QT (quantitative tightening, where the Fed shrinks its balance sheet) and the beginning of a new round of QE (quantitative easing, where the Fed buys Treasuries and adds them to its balance sheet).
Good points: please take a look at the thread I posted yesterday about FX interventions on Twitter
Letto.
Illuminante sulla situazione inglese. Una finestra sul futuro dell'Italia (e quindi dell'europa)
Alf you are the best guy I know in relaying macro stuff in plain language. Love your always structured, well explained and actionable analysis. Kudos
Nice words: thank you!
PAAWYC
(Please avoid abbreviations whenever you can)
Fair point! :)