A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:55pm to cover the release of the FOMC statement and subsequent presser.
There’s only a 3.4 per cent chance the Federal Reserve will raise rates today, according to Bloomberg’s WIRP function and the prices of overnight index swaps.
As recently as the end of December 2015, market prices implied odds of at least one rate hike by tomorrow at more than 40 per cent:
Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.
–Charles Goodhart, 1975 Read more
At the end of 2013, the CFA Institute surveyed its members on a range of topics, including the asset classes they thought would do best in 2014. The year isn’t over, but we thought it would be fun to update you on the status of those predictions.
US 10-year Tips are feeling the full brunt of taper-talk. First there was an abrupt sell-off on Wednesday in the 30 year sector, with break-even rates moving lower across the whole Tips spectrum after the US consumer price index fell for the first time in six months. Then there was a swift recovery with strong auction demand on Thursday following the Philly Fed.
As TD Securities’ Richard Gilhooly observed:
Treasury will auction $13bn 10yr TIPs at 1pm, a second re-opening that will take the benchmark size to $41bn. The real yield is around 61bp after the market has bounced on weaker Philly Fed, with 30yr nominals steepening out to new highs on the 5-30s curve before some aggressive buying in the 30yr sector materialised in the past half hour. 10y Real yields have ranged from 32bp in late October to a high of around 90bp in early September and an absolute low of -75bp in April of this year.
Thursday’s 5-year US Treasury TIPS auction was something of a noteworthy one, according to Kit Juckes at Societe Generale. Click to enlarge…
Last week, Kit Juckes at SocGen was one of many analysts who, after looking at the latest FOMC minutes, found fit to arrive at one overriding conclusion: the era of Risk-on, Risk-off (RoRo) investing is arguably coming to an end.
As he explained… Read more
The following chart, we propose, has the potential to inspire a whole new way of looking at the gold and Treasury market:
US 10-year Tips breakeven rates are surging, and talk of a revival in inflation expectations is, understandably, doing the rounds.
But we’re not entirely convinced that it is that simple. Read more
Low yields in the context of epic supply may baffle some people, but not UBS’s Chris Lupoli.
Lupoli, part of Global Macro Team, seems, if anything, to subscribe to our negative carry shift theory — the idea that a more permanent curve transformation may be under way. Read more
The spread between 30-year Treasury inflation-protected securities and Treasuries has fallen below the Fed’s unofficial 2 per cent target, signalling that inflation expectations are at their lowest since summer 2010, the FT reports. The 30-year break-even rate has dropped to 1.85 per cent recently, from 2.73 per cent last month. While the move has accompanied falling markets in classic inflation hedges like gold and oil, investors have argued that the price move reflect poor liquidity in the Tips market.
Pimco has bested Morgan Stanley in opposing bets on the direction of 30-year Treasury inflation-protected securities, the WSJ reports. The loss for Morgan Stanley is a blow to its efforts to build a more active bond trading desk. Pimco bought up 30-year Tips, tapping into rising concern that low interest rate have stoked long-term US inflation. A contrasting bet on inflation rising in the short term and falling further out saw Morgan Stanley short 30-year Tips and buy nominal 30-year Treasuries, reversing the trade for five-year bonds. Falling oil prices eventually undid the trade in addition to Pimco applying pressure via 30-year Tips buying, sources said.
Morgan Stanley was burned by a wager on US inflation expectations, Bloomberg reports, citing people familiar. The bank’s interest-rates trading group lost at least tens of millions of dollars on the trade, which the firm is now unwinding. Traders at the bank bet that inflation expectations for the next five years would rise in US Treasury markets, while forecasts for the next 30 years would fall. Such wagers on so-called breakeven rates involve paired purchases and short sales of USTs and TIPS, in both maturities. Zero Hedge explains that the recent fall in crude oil prices disproportionately hurt the value of TIPS.
Take a close look at this chart from Goldman Sachs:
Some grumbling from the belly of the US Treasury curve.
US Treasuries had a rollercoaster day on Wednesday as soaring crude sent the 10-year yield lower by 6 basis points. UST gains then reversed within a couple of hours. Meanwhile five-year breakeven rates (the spread between inflation-linked and regular US debt notes) rose to the highest since July 2008 on inflation concerns. Read more
In another display of nifty tentacle work, Goldman Sachs on Tuesday sold $1.3bn in 50-year bonds to retail investors — vastly beyond its original plans to sell just $250m worth.
While investors were (quite naturally) drawn to prospects for high, high yields at a time of rock-bottom interest rates, Goldman still managed to sell the bonds with a yield of 6.125 per cent — at the low end of estimates. On top of that, Goldman has landed a tidy hedge on inflation risk, as well as having diversified its investor base. Read more
The abnormal state of the credit markets has come back into focus after the US Treasury sold bonds with negative interest rates for the first time — and Goldman Sachs prepared to issue its first 50-year debt deal, the FT reports. Both developments on Monday highlighted the choices facing investors when interest rates are at historical lows and the Federal Reserve is preparing its return to asset purchases. The Treasury sold $10bn in inflation protected securities at a negative 0.55% yield, according to Dow Jones, sending a strong signal that asset purchases will stoke inflation. So where next? Inflation that runs out of control, commodity bubbles, and a Fed that has lost its credibility, worries Bloomberg. And to think FT Alphaville saw it coming months ago.
The abnormal state of the credit markets came into focus as the US Treasury sold bonds with negative interest rates for the first time and Goldman Sachs prepared to issue its first 50-year debt deal, reports the FT. Both developments on Monday highlighted the dilemmas for investors amid record low interest rates and moves by the Federal Reserve towards more asset purchases. Investors who believe the Fed’s efforts will lead to higher inflation accepted a yield of minus 0.55% on $10bn of Treasury Inflation Protected Securities (Tips). Meanwhile, Goldman prepared to sell $250m of 50-year bonds expected to pay interest of up to 6.25%, prompting ZeroHedge to ask: “Is Goldman now trying to appeal to retail direct?”
Tips — still the best, apparently.
As we’ve already discussed in some detail, Tips have been attractive investments in the current environment for several reasons: protection against expected inflation, of course, but also against significant deflation and against volatility. Read more
Treasury Inflation Protected Securities have returned 10 per cent this year compared to a 9 per cent return on Treasuries, the WSJ notes – arguing that whether inflation or deflation is in the offing, Tips have won. The breakeven inflation rate has also ticked up markedly in recent weeks, suggesting that Federal Reserve members have managed to bump up inflation expectations just by talking about possible quantitative easing, short of actually carrying it out at the next FOMC meeting. Of course — Tips are also likely to be bought in further QE, and also offer good protection if the Fed’s talk (and action) should lead to runaway inflation.
Sorry, we struggle to remember. Did Goldman Sachs have a longstanding QE2 view?
Oh yeah, right. Silly us. How could we have forgotten any of the following*: Read more
Now this is fun.
The gravity-surrendering movements in Tips — the US Treasury’s inflation-protected securities — have made plenty of headlines recently. Most notably, the five-year Tip yield sunk to a new low on Wednesday. Click to enlarge: Read more
Is someone turning queasy on QE2?
Here’s a Bloomberg chart showing the (sizeable) spread between the five-year forward US break-even inflation rate and five-year Tips yields: Read more
H/T to former FT Alphavillain Sam Jones — currently the FT’s hedge fund correspondent — for pointing us in the direction of some hedge funds that actually executed the largest arbitrage ever.
Rather successfully at that. Read more
National Bureau of Economic Research research claims to have documented the largest ever arbitrage.
It’s contained in a great little paper published earlier this month and it isn’t a fancy, schmancy accessible to high frequency traders only type of trade. Read more
So long as we’re looking at long-term home values, we may as well continue the history lesson by also observing the last century-plus of stock market performance.
And, err, the lesson is roughly the same: the sharp correction provoked by the crisis hasn’t been enough to bring prices back in line with the long-term trend. Read more
This is a bond rally, punk. Go long — go ultra-long — or go home:
Hedge funds now account for 20 per cent of trading volume in the Treasuries market, up from just 3 per cent in 2009, as managers attempt to profit from growing volatility and pricing inefficiencies arising from the Federal Reserve’s monetary policy shifts, reports the FT. Fixed-income arbitrageurs have joined such bond-trading global macro funds as Brevan Howard and Moore Capital in penetrating the once-sedate $10,000bn market — but at a cost. The average global macro fund is down 0.74 per cent this year.
Meanwhile, Tips yields are acting funny, with the five-year offering a negative real yield, Felix Salmon writes. That’s saying something about the perceived volatility of traditional inflation hedges like stocks, Nemo at Self-Evident says.
The FT’s James Mackintosh makes an interesting observation about the US Treasury inflation-linked (Tips) bond market in Friday’s short view column:
…something weird happened this week in Treasury inflation-protected securities, or Tips, US inflation-linked government bonds. For only the second time in history, the five-year Tips offered a negative real yield; that is, buyers get back less than inflation.
Treasury zero-coupon bonds are on the rebound and Strips securities are the stars of the US government debt market as inflation reaches a 40-year low, Bloomberg reports. Strips have outperformed S&P 500, the CRB Index and TIPS in recent weeks, after data showed that inflation is on the back-burner.
Ah, the “dollar trap”.
How can the US protect itself from China’s mass holdings of dollar-denominated securities, which it can dispose of at any time, if it wants to. Read more