Friday, April 25, 2008
James Bond: "Do you expect me to talk, Goldfinger?"
Auric Goldfinger: "No, Mr. Bond....I expect you to die."
It's a little-known fact that the above dialogue, perhaps the most iconic exchange in the entire Bond film ouevre, wasn't actually written by Ian Fleming. It never appeared in the Goldfinger novel, and instead was a creation of the film's scriptwriters.
Nevertheless, it is a pretty apt description of the current state of play in financial markets. In addition to the front-end carnage across the globe, bond markets broadly are getting smoked like a Scottish salmon this week.
Consider the price action in JGBs, which have cratered sharply through the uptrend of the last year or so. Sure, Japanese CPI has continued to tick higher, but that hardly explains the butchery seen in the JGB futures market:
The pain has not been confied to Japan, of course. Favourite object of market hatred, the UK, has also seen its bonds get whacked. Perhaps there is a small impact from the recent SLS, but a Q1 GDP print of 0.4% q/q doesn't exactly suggest that Gilt futures should have sold of four points over the last week or so:
Given the hawkishness of the ECB and the high inflation prints in Europe, it's probably unsurprising that Schatz have also broken down:
In the US 10 year future, 115-04 has been a pretty key pivot point over the past 6-9 months. The market has crashed through the level this morning, in sympathy with pain elsewhere.
What's driving this? Supply? Perhaps, as govvy issuance has ticked up in places like the US. Renewed economic optimism? Maybe- the Fed funds strip is now pricing in rate hikes in the second half of the year, having priced in cuts until very recently.
Inflation? Maybe...though breakevens are hardly suggesting that inflation concerns are paramount.
No, from Macro Man's perch this looks to be a good-old fashioned position liquidation screw job, perhaps exacerbated by short gamma-type positions from the mortgage convexity hedgers.
Ultimately, there are some tasty mispricings appearing on Macro Man's screens; he really struggles to see a scenario where the Fed tightens interest rates in H2, particularly given the general election in November.
Of course, in this game, timing is everything, and being early (as Macro Man has in buying the front end of the US) is the same as being wrong. Given his views on inflation, it's hard for him not to have sympathy with the long-end sell-offs; for the time being, however, Macro Man is just trying to be as adept as 007 at escaping Goldfinger's clutches.