Fixed income musings

Terror attacks such as yesterday's Belgian atrocity still have the capacity to shock, though sadly they seem to be increasingly common in the current turbulent geopolitical environment.   Although it's probably unfair, these sorts of events always seem to resonate more when they happen to people that look or think like us; while Macro Man's 12 year old son mentioned the Brussels bombings when he got home from school yesterday, he never noted the similar atrocities in Turkey a few days previously.

That shock factor is no doubt why sterling sold off yesterday, the thinking being that it would increase support for the Brexit campaign.  While a departure from the EU would give the UK more control over its borders, this would hardly guarantee that such acts could not be perpetrated in Britain, or even that would-be terrorists would be prevented from entering the country (short of an untenable Trump-style ban on Islamic visitors.)   Equity markets were quick to shake off the impact of the bombings; Macro Man would expect sterling to eventually follow suit.

Switching gears back to the Fed, yesterday's developments did little to dissuade anyone that the tide has switched back towards a hawkish tilt.   Although the Richmond Fed survey is kind of a Z-list datapoint, yesterday's upside surprise was an 8.8 standard deviation event, which tends to open a few eyes.   While the survey is noisy, its trend generally correlates with that of the manufacturing ISM:


Obviously, there is no guarantee that ISM will bounce hard, if at all; nevertheless, the Richmond figure at least introduces the risk.   More broadly, the data continues to improve relative to expectations; the Bloomberg economic surprise index has made another new high and is closing in on zero for the first time since the beginning of last year.


The tone of the two Fed speakers yesterday, Evans and Harker, suggest that there may have been more than a few players of "change that tune".  Evans is a well-known dove, of course, but sounded pretty constructive on the state of the economy.  True, he validated the current median forecast of two hikes this year; then again, if that's where the doves currently reside, what does that suggest about the balance of risk for the centrists on the committee?  Pat Harker, meanwhile, is a relative unknown in terms of his views...or at least he was until yesterday.  He was as explicit as Macro Man can recall an FOMC member being about his views, specifically stating that he is not a two-dot man.   To date, Bullard is the only voter to speak after last week's meeting, and as discussed he has apparently changed his mind.  As such, it's probably premature to draw too many conclusions, but still: it's hard to escape the feeling that the hawks are starting to spread their wings a little bit.

Given that the Fed is forecasting a deceleration in core inflation by year end, it should be clear that every PCE print henceforth will be a big one.  Last week, of course, saw an upside surprise in core CPI,  and while the correlation with core PCE isn't perfect it's also not nonexistent, either.





Bear in mind that barring any revisions, a monthly change of just 0.21% on monthly core PCE will lead to a print of 1.8% y/y.  It would be easy to see fixed income sell off on that, particularly when you consider that real 10y yields are already pretty skimpy.   Seasonality also favours moderately higher yields:


Of course, bond prices are now set in a global, rather than domestic, marketplace.   1.95% might not seem like much, but it's a king's ransom to investors in JGBs (-0.09%), Bunds (0.21%), or even BTPs (1.25%).  This, along with sluggish inflation, is one of the reasons that the US curve has flattened so much despite the paltry degree of movement in very short end yields.



The immediate reaction of the street to last Wednesday's Fed was "this is a curve steepener".   It seems daft to be pondering steepeners after one hike in a new cycle, but such is the way of the world these days.   To be sure, from a technical perspective a 2-10 steepener looks a bit tidier than outright shorts on 10's, with a tighter risk/reward parameter:


Then again, if the Fed really is going to change their tune, does a steepener even make sense anymore?  Do you want to be long 2's at ~ 90bps ahead of more possible Fed hikes?   It's for this reason than Macro Man has generally preferred scouring the short end for trades.<90 ahead.="" an="" and="" anomaly="" as="" augur="" bps="" day="" days="" declines="" edged="" end="" eurodollar="" finds="" focused="" follow="" for="" further="" generally="" has="" have="" he="" higher="" however="" in="" is="" it="" large="" macro="" man="" may="" nbsp="" not.="" not="" notable="" of="" on="" one="" p="" probably="" rates="" reasons="" recent="" s="" scouring="" short="" something="" tended="" that="" the="" these="" this="" through.="" time="" times="" to="" trades="" weakness="" weeks="" well="" which="" why="">
<90 ahead.="" an="" and="" anomaly="" as="" augur="" bps="" day="" days="" declines="" edged="" end="" eurodollar="" finds="" focused="" follow="" for="" further="" generally="" has="" have="" he="" higher="" however="" in="" is="" it="" large="" macro="" man="" may="" nbsp="" not.="" not="" notable="" of="" on="" one="" p="" probably="" rates="" reasons="" recent="" s="" scouring="" short="" something="" tended="" that="" the="" these="" this="" through.="" time="" times="" to="" trades="" weakness="" weeks="" well="" which="" why="">
Finally, Macro Man was struck by the advertisement below in his Twitter feed.  He's not sure what's more remarkable: that after all this time, he still finds the notion of a 1% yield as "high" to be farcical, or that HSBC is marketing this as a way to make your vacation "12 times closer."  To put that in perspective, a family with $20,000 in that account would need to keep it there nine and a half years to earn enough interest to fund a $2000 vacation.  Macro Man isn't sure exactly what message this ad sends....but it's not a good one.





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Anonymous
admin
March 23, 2016 at 8:26 AM ×

Something weird going on with your html in the penultimate paragraph. But great post as always, MM!

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Anonymous
admin
March 23, 2016 at 8:40 AM ×

"short of an untenable Trump-style ban"

Nothing untenable about it.

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Anonymous
admin
March 23, 2016 at 9:02 AM ×

EZ equity indexes making higher highs...

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Anonymous
admin
March 23, 2016 at 10:32 AM ×

"Bloomberg economic surprise index"

Could someone please tell the guys to lower data expections,so we can get more suckers to buy buy buy. Would certainly help me get a nice entry for the short of a lifetime.

Nice one!

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Hoboworldwide
admin
March 23, 2016 at 10:32 AM ×

You think the HSBC add is worrying. Funding Circle are sending out advice to switch your ISA to them as Peer to Peer lending has generated 7% per year over the last 5 years................ can't possible go wrong!

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Anonymous
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March 23, 2016 at 11:23 AM ×

Every Dow stock now above all 3 ST moving averages (10d, 20d & 50d)...exceedingly rare (led to strong returns a year out historically).

All the market stats now pointing to a massive Bull rally.

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Anonymous
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March 23, 2016 at 11:52 AM ×

http://www.bloomberg.com/news/articles/2016-03-23/half-of-world-s-stocks-embrace-bull-market-on-fed-inspired-rally

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Leftback
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March 23, 2016 at 12:09 PM ×

Yes. The new risk would seem to be from upside surprises in US economic data. When these arrive, and we suspect that they will [MM has already shown us that they may be here], a firmer USD is the likely result, with the usual consequences for a number of vehicles that have traded up in recent weeks as the greenback drifted lower. Say goodbye to the rally in AUDUSD and a variety of commodities, some of which are overdue for a rendezvous with their supply/demand fundamentals.

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Polemic
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March 23, 2016 at 1:09 PM ×

Yes MM, Next swing in Fed expectation has to be away from extreme dovishness and inflation pressures are the elephantine shadow in the room.

Can I remind all recent commenters that believe in the absoluteness of their market calls, whether up or down that the world is made of the sum of billions probability curves. There is no certainty and one has to be as flexible and adaptable to new inputs as possible and new inputs will occur before the term of your trade. For those of you so adamant that this is the biggest sell or buy of the century you might as well buy or sell and go off on holiday and not worry about it any further and certainly leave this blog board alone as you will not be rewarded by anyone here for being right. Though you will be respected for raising new inputs that no one else has noticed.

As for stats pointing to a bull rally, moving averages are momentum measures and show where we have been. Yes, momentum models use them and so become self reinforcing to a degree but perhaps the corollary to your argument is that a moving average is an average and so we should ask which is more likely - To be away from the average or at it? Last point - if your 3ST MA signal is very rare are you sure your statistical sample is large enough to be relevant to draw conclusions from ?

by the way Hoboworldwid, my accountants have just recommended my business looks at peer to peer lending to raise funding. My take away was that If some mugs are really interested in lending to us unsecured at rates around 5% then sure. unsecured. unsecured... are they nuts? Like you I am gob smacked that everyone is welcoming the regulation of banks (Nasty evil thieving bstds ahem) and then the disintermediation of them by fin tech yet completely missing the very points of banks - Credit mediation. Handing the ability to judge true credit worthiness vs returns to Joe Public is like handing them crystal meth in a sherbet wrapper. There will be highs but sure as sure, they will get totally fkd.

Right, I'm off to borrow 50p for a cuppa tea guv.

Yours (a slightly bolshy) Pol.




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abee crombie
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March 23, 2016 at 1:20 PM ×

LB, I think the question is not whether the AUD and anti dollar trades take a breather at some point, bc they inevitably will, but more so, was February the end of the oil/EM/Value sell off which has been going on for the past say 15 months. If that is the case, which it looks to be so far, then a bunch of different trades will be put on in the market in the coming months. The past few weeks, the best trades have simply been the opposite of what was working. But a lot of those trades look done, as you suggested by the AUD. Many of the algo's running these trades are reset monthly, along with lots of HF's risk & PnL limits.

The question I am thinking about is do we go back to the 2015 regime, or switch to something new.



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Macro Man
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March 23, 2016 at 1:25 PM ×

@ Pol, I think you are generally arguing against a straw man. The only absolutists are the trolls, who I am trying to weed out anyways. Don't condescend to others whose views are shaped with, or perhaps because of, risk parameters in mind.

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Anonymous
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March 23, 2016 at 1:29 PM ×

Commercial Real Estate Sales Plunged Almost 50% Yoy In February - WSJ
( like a church bell gonging to call the top )

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Polemic
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March 23, 2016 at 1:32 PM ×

MM. Yeah you are right.

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March 23, 2016 at 1:51 PM ×

As a/the resident monetarist, I remember (ok, I searched...) posting about interest rates and monetary velocity way back in Nov, 2014. I think it would behoove investors to realize that an increase in velocity via higher interest rate targets without knocking down M2 will likely lead to further increases in inflation. I wouldn't let go of commodities and other inflation hedges quite yet.

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washedup
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March 23, 2016 at 2:11 PM ×

"I'm off to borrow 50p for a cuppa tea guv"

Y rt Pol - 50p won't even buy u a sideways glance from the leather clad barista at the fancy mayfair cafe ur headed off to.

Good discussion - I think it underscores more than anything that the equity rally is at a crucial point, with greater risk than normal because so far its played out according to script, but the odds that we diverge from that script and sow confusion and doubt in punters (bearish or bullish) are increasing fast. Your probability distribution is wider than usual.

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Anonymous
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March 23, 2016 at 3:03 PM ×

http://www.bloomberg.com/news/articles/2016-03-23/flows-to-volatility-etfs-becoming-deluge-as-s-p-500-rally-hedged

"TVIX, which bets on an increase in the Volatility Index, absorbed $160 million on Monday, the most ever for a single day and almost twice the security’s previous record."

"A leveraged ETF returning twice the performance of the VIX has also seen all-time inflows, even with the fear gauge below 15 for five straight days, the longest such streak since August."

Hmmmmm?

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Leftback
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March 23, 2016 at 3:07 PM ×

Marshall, as the resident monetarist you are probably watching M2V all the time, but unless you have access to more recent information on Q1, the St Louis Fed data suggest that velocity is still falling:

M2V 5 Year Chart

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Anonymous
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March 23, 2016 at 3:57 PM ×

I would agree with the view promoted by Ray Dalio that suggested that velocity is not a really useful tool to explain the credit in the economic system.

I am more surprised by the flatting of the yield curve for the last few days. The yield in long bond is so low that I could not see where else the money in equities can go these days.

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Anonymous
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March 23, 2016 at 3:59 PM ×

Polmic, my post at 10.32 seems to offended you in some manner.

Think of it as a follow up to MM's jeopardy theme from yesterday... Eg. I have given the answer, whats the question?

It has already resonated with others, and no doubt MM is already on the case, it may take you a bit longer to grasp. But the fact that it annoyed you so, I suspect you are already doodling.

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Polemic
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March 23, 2016 at 4:16 PM ×

Nahanon .. my apols.. .. it was probably very relevant, it just instantly registered as a 'buy buy buy' or 'sell sell sell' comment (prob due to the 'buy buy buy' words and so I hastily confined it to the binary bucket of opinion. So sorry. add to that I m in a bolshy mood today having heard (not so much there but elsewhere) every old fact being trotted out to support no new argument.

So .. let's start afresh ..

I have to say that LB's comments are resonating with me. Momentum is struggling in many recovery things especially my fave the metals where copper i back on the fall and oil is for once going down, both which would suggest end of short covering phase and the market is tipping for a move south. I have been watching FTSE as a Commodity EM and DM stock rep yet it has been really nailed around the 6200 throughout the whole of March. and fairly stuffing me overtime I think it's going to break one way or the other. Funny old world.

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Leftback
admin
March 23, 2016 at 4:25 PM ×

Further to Polemic's comments on the metals above, it has been a really rough day for the Aussie, and some of the other commodity currencies like RUB and BRL have been absolutely hammered today. MXN and CAD are also being hammered.

The Bucky Bounce is on.

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TraderJim
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March 23, 2016 at 4:45 PM ×

MM insights on Feb hawkish tones picked up on ft.com as well...

"But if investors take time to summon up the courage to dip into EM, it may be too late. Strong US data may force the Fed’s hand, creating a rush for dollars. Already, the usual Fed suspects are sounding more hawkish than the position agreed last week. If the carry trade is back, it will probably not be around for long. A short Spring of mild temperatures may yield to a very hot and sticky summer."

http://www.ft.com/cms/s/0/140b11d2-f043-11e5-9f20-c3a047354386.html#axzz43cwmD3Bv

EUR seems to be pulling down from the 1.135 level tested in 11-feb and recently 17-Mar

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Nico G
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March 23, 2016 at 6:57 PM ×

good call on bucky lefty

1.15 seems to be the consensus cap on EUR might be wise to play the 1.03-1.13 Atlantic channel

besos desde Bilbao

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Anonymous
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March 23, 2016 at 7:04 PM ×

My acumen has been rendered worthless by fucking algos and wifey refuses to copulate.

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Polemic
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March 23, 2016 at 7:06 PM ×

I nominate anon 7.04 for 'comment du jour'

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Anonymous
admin
March 23, 2016 at 7:10 PM ×

Fixed income...I'm not selling...well I mean I can't sell!

via BBG:

Signs of stress are multiplying in Japan’s government bond market, which is crumbling under pressure from the central bank’s unprecedented asset-purchase program and negative interest rates.

Bank of Japan Governor Haruhiko Kuroda has repeatedly said his policies are having the desired effect on markets, including suppressing JGB yields. His success is driving frenzied demand for longer-dated notes as investors avoid the negative yields offered on maturities up to 10 years. And as buyers hang on to debt offering interest returns, the BOJ is finding it harder to press on with bond purchases of as much as 12 trillion yen ($107 billion) a month, sparking sudden price swings leading to yield curve inversions that have nothing to do with economic fundamentals.

“We hold a lot, and we’re not selling,” said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance, which has $59 billion in assets. “We can get interest income. If we sell, there are no good alternatives.”

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washedup
admin
March 23, 2016 at 7:16 PM ×

"My acumen has been rendered worthless by fucking algos and wifey refuses to copulate."

Indeed - its all downhill from here - MM - lets freeze frame and admit that nothing we say from this point in all of 2016 shall match the sheer insightfulness and wisdom of this comment.

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abee crombie
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March 23, 2016 at 7:18 PM ×

MM, was just looking at CAD and AUD in relation to their 2 year interest rate spreads vs US, which has done a good job correlating with the move over the past 2-3 years. Any thoughts on the recent divergence, whereby both AUD and CAD have overshot vs yield spread.

Thanks

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Leftback
admin
March 23, 2016 at 8:15 PM ×

LB has had a very decent day of it today. Directional positions we entered Friday through yesterday in GDX, IWM, USO and XLE have rewarded our patience. No prizes for guessing the directionality.

Still waiting for AUDUSD and UUP bets to pay off in full but it's looking good for the trend change in FX that we had proposed. As everyone here knows all too well, if you get the major FX moves right, some degree of trading success usually follows.

Last year was a lesson for LB to the extent that the obverse also applies, as our portfolio suffered greatly from the extent and duration of the dollar's bull run from 2014 into 2015. MM is still enjoying taking the p*ss over that major FX mis-read.

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Anonymous
admin
March 23, 2016 at 9:44 PM ×

@abee --

Just a quick "thanks" for the heads-up on US Steel bonds back in November. That's the kind of idea well inside my comfort zone, unlike most of this macro stuff.

If all of my trades returned 50% in four months, I would be done pretty quickly

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Polemic
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March 23, 2016 at 10:00 PM ×

Right. I'm going to regret this but you have all persuaded me that the market will struggle to go higher from here and I have done something I haven't done all year. I ve gone short equities. there really doesn't feel as though there is enough support form the rest of the correlated cast and the last week of sideways is looking less likely to resolve upwards with my old faves fading.

After having visited rehab declaring I am a JBTFDer. I have to now have to declare.
'My name is Polemic .. and I just sold the rally"

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Tim Schulace
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March 23, 2016 at 10:28 PM ×

Maybe jbtd will get his chance at 1950 to reload. I feel bad that he only has 25% of his risk on.

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Macro Man
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March 23, 2016 at 11:44 PM ×

@abee, I've not run these models recently but I would be willing to bet that the outperformance of the commod currencies vis a vis rate differentials is down to am terms of trade boost from commodity prices. In other words, include copper or iron ore to an Aud model, oil to a CAD model, and I think that will explain the price action.

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Anonymous
admin
March 24, 2016 at 12:45 AM ×

anyone has a take on Sarao extradition?

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Polemic
admin
March 24, 2016 at 12:47 AM ×

The only logic I can see to his extradition is that Guantanamo is running out of inmates. The whole thing is nuts.

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Nico G
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March 24, 2016 at 6:40 AM ×

the spectacular Eurostoxx triangle since Draghi whipsawing Thursday two weeks ago is likely to break on the downside - lookout below. Meanwhile here is how the Fly reports on Europe migrants snafu. It ain't pretty

http://ibankcoin.com/flyblog/2016/03/23/coming-soon-to-a-refugee-filled-european-city-near-you/

Now that everyone has a camera in their phone, Youtube has become an overwhelming hub for 'micro' reporting. In a way it enhances social conscience at large - i see this as a very positive. If you're going to misbehave chances are there will be someone near you who will post you to shame on youtube.

LIke the great Jim Jefferies put it, the only commandmemnt in any religion would be: 'try to not be a cunt'.

https://www.youtube.com/watch?v=qh3wLT2nIr8 enjoy !

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