Tuesday, June 29, 2010

Bond vs. Goldfinger?

Team Macro Man are picking their fingers up off the floor with their teeth having failed to catch a falling knife yesterday.

So what kicked all this off then? Well the only "news" was the downgrading of Chinese growth expectations (those Communist party guys love to leak their data...) and a story that Japanese exporters aren't hedged enough with respect to the Euro. With the rates moves already in place that last straw saw JPY take off. Meanwile, the Chine PMI leak-induced sell off was followed by the usual rumour of some Chinese tycoon going bust and bailing out of everything. The rest of the move appears to be price driven...

The deflation trade goes ballistic even if core PCE comes in higher than expected: the double dippers are in charge of the 'hood. The US curve has been more flattened than a penny on a rail track, and even Gold begrudgingly comes off from its highs. We don't know how long Gold can hang
on to its "inflation on money printing" prop whilst the rest of the World applies the steel press to the US curve on the deflation argument. Can you have both? That is a question Team Macro Man will have a go at answering below...

As in last Thursday's post, Team Macro Man is astounded as to how quickly some quarters of the fixed income market have begun to price in deflation. The latest chart we want to bring to attention is the 5y5y forward nominal UST yield, which is plumbing depths not seen since April 2009, in line with 10yr yields themselves. But what is interesting is that the bulk of the moves have been Real Rate-led (see below chart, brown line 10yr real yields), not by inflation breakevens (white line, 10yr breakeven). In fact, 10yr Real yields are now within a whisper of their lows in March 2008 during the TIPS collateral squeeze. Odd indeed...Or is it? Team Macro Man, above, noted its confusion that despite the curve bull-flattening and seemingly pricing in a deflation trade, that Gold still feels more bid than an iPhone4 at a media convention. A quick chat with a seasoned FX Spot Shag yields the response "well, we flatten the curve because of deflation, an' then we buy Gold 'cos they'll print more money". Experience has taught Team Macro Man that, often, over-thinking things is counter-productive, and Occam's razor applies. The below chart shows Gold (white line) vs. a proxy for 10yr Real Yields (brown line - constructed from US, UK, EU & JN inflation swaps weighted by GDP) on an inverse scale. Funnily enough, they seem to be saying the same thing...So perhaps the real situation here is that though many Gold Bugs have bought Gold on the inflationary argument, they are finding new support from double dippers' deflationary arguments driving yields lower. Heads I win, Tails I win... GGUF!!! How odd. Either breakevens need to come lower, or Gold and Real Yields look vulnerable to a correction... The battle here is not Bond vs. Goldfinger. This time they are on the same side fighting Oddjob.

13 comments:

Biofa said...

It seems to me that to be long gold now is a step too forward, and i assume that could be dangerous to be too ahead of the curve sometimes... and in particular it seems to me too much conflicting with flatter curve.

CHF is going to create new pressures in Eastern Europe... i've read that Swiss CB has bought a lot of euro, so i think that a lot of their balance sheet is euro denominated, so how can eurchf to be a 1.32..any insight about this cross???

Tyler said...

re: failing to catch a falling knife.

I thoroughly appreciate that you stuck your neck out and made a call. You had good reasons for it and hopefully you will not dissuaded you from making more calls in the future.

cheers

Leftback said...

Timely post as US 10y below 3% today but Goldfinger still defying gravity. Gold positions may be the only thing holding up the long gold/short Treasury hedge funds and prop desks out there.

Would rather short gold than the long bond if we are turning Japanese, but don't feel like wandering into the path of either steamroller - outside of some short-term hedging and trading.

Many of us are watching the imminent "Death Cross" of the 50 DMA and 200 DMA in SPY, which has often presaged episodes of intense selling. Once they start selling gold and TIPS again ... it will be no catching falling knives for a while.

Nemo Incognito said...

Price action in Gold seems to be some kind of battle of the bots.... feels like one hell of a game of chicken out there between 1230 and 1255ish. FWIW I'm cashing in my chips.

Martin said...

EURCHF is what happens when a hedge fund type gets to run a central bank.

Gooner70 said...

I was looking at Gold yesterday from a technical angle...

http://hometraderuk.blogspot.com/2010/06/gold-at-key-juncture-possibly.html

Nemo I stated 1200 or 1300 as the key levels, but in truth I bottled it slightly,, I think your 1230 and 1255ish level may be truer.

scharfy said...

Can you guys keep up this pace? The posting here has been fast and furious, and damn insightful.

Thx Team Macro.

Oliver said...

interesting to note the action in copper y'day... as noted "in this space" (as MM would say) that it mirrored the action of other classical risk assets for the first time in a while

Oliver said...

@Leftback: SPX is not alone in flirting with an ma xover / 200dma... Crude for example is all chop around the 200dma, and the FTSE has gone every which way but north after bouncing off the same.

@ everyone (given above): US 10y yields also punching new lows for the year, Gold looking choppy/toppy - not to mention the ├╝ber bearish piece from RBS today...

... I mean: the consensus seems to have the ranch on double dip; sell side are now making markets in tin hats; technicals also are bearish.

I know MM is now in the land of the free (or brave? whatever), but it's practically the summer and the world cup / wimbledon is on...

... Don't catch falling knives and all, but this is a thanksgiving-sized-Flamingo IMO.

Hans said...

Team Macro Man has not done their research. I've read this blog for 3 years and now i feel compelled to make a post. Question - how does gold perform historically in a world of negative real interest rates. Currently, this is the environment we live in and one that we must answer to. The answer is that in periods where real yields are negative, Gold actually OUTPERFORMS the market, as it is a store of value and will always beat a negative-return savings account. Thus, the premise (which TMM alludes to) that ppl are buying gold on the notion that we'll have an inflationary environment is downright wrong. People are buying gold because of a lack of faith in FIAT CURRENCIES. That is, Gold has been around since the time of the Incas and Mayans and will always, as long as ppl believe in it, have a store of value. The EUR, USD, or JPY on the other hand will not and will eventually cease to exist at some point in time. Question - what was the currency called in Roman Empire time? Like Isner, point taken.

Biofa said...

@Hans: according to me when someone talk about an inflationary environment in this case I think that CBs will be obliged to print money, so essentually debase their currencies... it's the same thing than to tell that you haven't faith in fiat currencies!!!!

FX said...

Your reaching, TMM, thats twice within short time you've thrown up that 10yr vs Gold chart,I'll throw my hat in the ring, though it's all been said and done around the traps no doubt.

Definitley partial to Matt Sibleau theory of the " Non Neutuality of Liquidity".

My thinking is none of it is going to return to housing in a hurry,

Rates are very low compared to historical levels , this is one variable a lot of large firms make a base case of, so that brings one of my favourite principals into use.

Market Value Threshold, every major segment has one , but where is it?, it's up to the individual to decide, Gold has one , where? in relation to Bonds, for the moment while QE is always in the air , BOTH will no doubt keep finding that mystical level.

Daniel said...

Th negative asian data is a short term consequence of the EU troubles. That is not what drove the markets yesterday though. The inability to pass finreg because of the senators death and the end of the ECB one year lending facility was the cause.