How much forecasting, we wonder, amounts to ‘the present, plus or minus a bit’.
Not because it is a bad way to make predictions, rather that if there has been little change for a long time in something like benchmark interest rates, the expectation for change itself is likely to shrink. Eventually it becomes hard to imagine anything much different from the present at all.
Thoughts which arise thanks to Gary Jenkins, Chief credit strategist for LNG Capital, who draws our attention to an unscientific poll taken at the recent European Leverage Finance Conference. Read more
A likely quiet week lies ahead after trading holidays in the UK and US, and with limited data releases on the calendar. The FT’s Mike Mackenzie and I have a look at the US markets where the S&P closed at a record high on Friday but the pace of gains has slowed to a crawl.
Here is how a (now very sad) institutional investor was positioned during this year’s rally in bonds, commodities and equities according to Michael Hartnett’s latest Thundering Word at BofAML:
Very simply portfolios were positioned, in an extreme way, for Higher Growth-Higher Yields-Higher Dollar, and that backdrop is yet to transpire (Portfolios were also positioned for sub-7% China GDP and that also didn’t happen). Investors long Small Cap, Tech & Banks and short Gold, Government Bonds and Emerging Markets have been hammered.
More to the point, says Hartnett, those reeling institutional investors have been rushing into cash as their performances suffered. That was helped in no small part by the rally in Treasuries: Read more
Some broad thoughts on the economic and market cycle arrive from Nikolaos Panigirtzoglou and team at JPMorgan, to help active investors (most of them, it seems) who are scratching their heads and looking perplexed.
Despite range trading and low market volatility, active investors feel extremely uncertain about markets. Very few have beaten their benchmarks and our model portfolio also is barely in the black YTD.
Some charts will help below but the central question is why, five years into a US expansion, have bonds not sold off more? Read more
So, dear sceptic, you think that interest rates will go higher. Prices for debt will fall, meaning a wonderful opportunity to bet on what must occur. Easy.
Except it turns out that trading a bear market in bonds is hard. By way of example, BofA Merrill Lynch offer up the last rate tightening cycle that began on June 30, 2004. Imagine you decided to go short exactly a year beforehand.
During that period, 10y Treasury yields rose 117 basis points. However, once adjusted for negative carry and roll-down, an investor would have made only about 70bp, assuming a short position in 10y Treasuries was established on June 30, 2003 and held it for the next year.
Correlation, causation, or Rorschach test we’re not sure, but the latest from BoA ML strategist Michael Harnett leads with a quite remarkable chart.
Rainbows are always just over the horizon, the recovery is around the corner, and interest rate hikes are always two years away.
That timescale tends toward the far enough that we won’t start to discount it just yet, but close enough that we can claim to be anticipating it. (Who cares what happens in three years time, anyway?) Read more
Given that a certain Secretariat of the world’s biggest bond fund has attracted some attention of late, lets give the newest investment outlook from Pimco’s Bill Gross the once over.
On Sunday Pimco issued an intriguing tweet from Bill Gross, the undisputed King of the bond mountain.
The whole we’ll taper soon, oh no, actually not yet behaviour from the Federal Reserve last summer had, as you would expect, an impact on the volume of US treasury trading.
But it didn’t last. JP Morgan reports that monthly trading volumes of $2tn in April rose to an average $2.7tn in May and June, then dwindled with overall volumes for the year actually down on 2012. What might surprise, however, is that the post crisis decline in volatility for Treasuries (and many other securities) has not been seen in German Bunds and Japanese sovereign debt. Read more
Bond vigilantes might want to turn away. The following analysis is not pretty for those who have bet everything on a taper-related spike in US yields.
As HSBC’s Steven Major notes on Friday, he is doubtful that the short-term path for US yields will be anything other than lower.
Key to his analysis is the fact that growth and inflation are disconnecting in an unusual way:
At some point in the great collective peyote dream that was last month’s debt ceiling crisis, we asked you to imagine the Fed buying defaulted US Treasuries.
Fortunately, the US central bank was thinking about it too. Read more
Every Federal reserve bank shall have power…
…To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.
– Section 14.2(b)2, Federal Reserve Act
Now, reading that carefully…
Does that mean the Fed can’t buy defaulted US government debt? Read more
If you really, really want to see the US Treasury’s final rule on its issue of floating rate notes (from the beginning of next year, using 13-week T-bills as a reference rate) — here.
Scott Skyrm noted on his blog earlier this week that it took only six months of Fed QE purchases to move GC rates from an average of 0.24 per cent in December 2012 to an average of 0.05 per cent this month.
There is, consequently, a growing distortion in the short-term funding markets, which is clearly one of the first unintended consequences of the QE programmes to surface: Read more
Presenting, the latest US TIC flows as put together by Gennadiy Goldberg at TD Securities:
What’s really responsible for higher US yields? Falling demand from domestic and western investors? Or Chinese and Japanese official flows?
Earlier in June, TIC data sent us a very important message. Abenomics was somehow prompting the repatriation and redistribution of money held in long-term USTs by Japanese investors, as this chart from Nomura shows:
Now north of 2.5 per cent:
Yes yes — suddenly, a bad last day of May for the stock market:
Here’s an interesting thought. Could the gold sell-off be related to a squeeze on collateral brought on by a series of very different bank crises in Europe, starting with the SNS Reaal nationalisation and Anglo Irish emergency assistance operation and culminating with the Cyprus crisis?
It’s a theory being considered by Jeffrey Snider, chief investment strategist, at Alhambra Investment Partners.
The basic point being, when you haven’t got anything to repo and funding becomes tight, gold is likely to sell-off in anticipation of further banking and asset problems. Read more
US Treasuries are kicking up with the 10 year threatening to push through 2 per cent for the first time in quite a while. It’s a little bit of economic optimism — better data means more chances of Fed tightening.
Capital Economics did the needful and put voice to the idea that the bull rally in Treasuries might have further to run for all sorts of not very contrarian reasons (our emphasis): Read more
It’s not perfect, we know. But the weekly CFTC derivative positioning report is still a useful barometer when it comes to gauging investor sentiment.
On which note here’s the breakdown of the latest report with respect to UST spec positioning, courtesy of TD Securities: Read more
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
This is reassuring (or not – we can’t decide). The Global fixed income strategy team at HSBC *believe* they’ve come up with a non-consensus view on the effects of QEternity:
Our non-consensus view is that QE3 will drive US Treasury yields to new lows Read more
Okay, who’d forgotten that FDIC deposit insurance for non-interest-bearing transaction accounts expires at the end of December?
We confess, it did slip our minds – momentarily. Read more
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
Bloomberg writes about a report by the US defence department to Congress about Chinese holdings of US Treasuries, and has helpfully uploaded the document itself (click below to open in pdf):
Arvind Krishnamurthy and Annette Vissing-Jorgensen have an interesting variation on what the Fed should do next: start buying MBS while selling longer-term Treasuries.
Buying MBS, of course, has been widely discussed as a potential option if the Fed chooses to begin another round of large-scale asset purchases, but Krishnamurthy and Vissing-Jorgensen are the first economists we are aware of to advocate also dumping long-term Treasuries. Read more
The US borrowed for 10 years at the lowest rate ever in Wednesday’s auction (technically a reopening of an existing bond).