Another rout

Another day, another bond market rout, this time courtesy of a lousy 30 year auction, which tailed for the first time since January.  It's worth remembering that the further out you go on the curve, the less of an anchor that monetary policy provides to yields....and the more that longer term credibility concerns can manifest themselves.  The upshot was a new post-Brexit low for bond futures, which traded in excess of 100,000 more contracts than they did yesterday.   Market 1, Brainard 0.


Insofar as bonds are the new oil (i.e., the market that all others are keying off of), the implications elsewhere were swift and brutal.  Macro Man can only reiterate once again that volatility clusters; the pity of it was that there was zero extension of the bounce to afford a more attractive entry point.  Macro Man was also intrigued to see EMB (the emerging market bond ETF) tumble on its highest volume in nearly two months; it's been a nice run, but it seems as if longs are heading for the exits.

And that, in a nutshell, is the theme of the financial repression era.  For just about every asset out there other than G10 government bonds and US equities, the temptation to ring the register at the first sign of trouble is nearly overpowering.   While policymakers are clearly not overly bothered by the behaviour of financial market speculators, investors probably should be, as it has created a climate of penny-chasing, high turnover, and lousy returns.

Macro Man is pleased to be able to show, on an exclusive basis, footage from one prominent dealing room over the past few days:




Oh, wait.   That might actually be the video from the Fed's communication committee.   Either way, it seems likely that the current volatility regime will be in place for another few days before things calm a bit ahead of the FOMC announcment.   The only question is whether we get two sharp downdrafts in a row.   At the moment, Macro Man is leaning towards another one today;  after all, the capitulation in EMB only started yesterday, and it seems unlikely that it can be resolved in a single trading session.   While Macro Man has been something of a butcher with his intraday timing this week, he's sitting tight with shorts for the time being.

Finally, thank you very much to readers for your kind messages yesterday and for your feedback on the proposed changes to the site and the data providers (or current lack thereof) behind it.  Please rest assured that your author values the little community here as much as the participants, and will strive to ensure that it can continue as much as possible without imposing overly onerous monetary burdens upon its members.

Should the big switcheroo go ahead, this is likely to resolve itself via a tiered membership/subscription scheme.   The details are still being hashed out, but he hopes that there will be something for just about everybody in terms of pricing, community, and content; watch this space!
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Skippy
admin
September 14, 2016 at 1:01 PM ×

MM, thank you for the effort of the years and the excellent contribution from the comments section. I genuinely appreciate it and would pay for a subscription. I apologise for my own limited contribution.

On the bonds, I am not surprised by the correction given the rapid and emotional rally or acceleration in price earlier this year after a 35 year down trend and overwhelming consensus belief in lower for longer. That includes the lead up to Jackson Hole which suggested a capitulation in beliefs from central banks on r*

That said, the recent macro news flow has not been particularly robust in the US. The ISMs and surprises more broadly. Inflation expectations have also not moved very much. While the longer term set up is bearish, tactically the long bond might recover relatively soon. The macro news flow over the coming days may be telling on whether there may be a mini growth scare coming.

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Skippy
admin
September 14, 2016 at 1:28 PM ×

Another way to put the bond correction into longer term context is to say that your greatest concern is not your greatest risk. In the post crisis regime, investors have feared low trend growth, secular stagnation, deflation, demographics and the low rates that ensue. However, since everyone is positioned for that, your greatest risk is rising interest rates, for whatever reason at all.

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Skippy
admin
September 14, 2016 at 1:38 PM ×

Skippy was in Tokyo late last week and met one Board Member of the BOJ. Most of the discussion was consistent with the recent public speeches from Kuroda and the Deputy Governor. However, it strikes me that the potential for the BOJ to stuff up the communication next week is rather high. They appear to want to increase asset purchases while tapering long term debt at the same time. I would not rule out going more negative on rates. He argued that the Banks had ignored the benefit of lower credit costs as an offset to lower interest margins. Of course credit costs are lower if you keep zombie capacity alive. Moreover, there is a visible slow down in credit growth over the past few months.

He also admitted that the only thing a central bank can really do is to try and raise inflation expectations to get the real interest rate below the natural rate. Only the government can raise potential growth through structural reform.

Still, Tokyo is a wonderful place and a lot of fun. The quality of the infrastructure, service and food is world class.

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washedup
admin
September 14, 2016 at 2:06 PM ×

Thx for that color skippy, especially since its fair to say the japanese are the unfortunate equivalents of lab rats in an ongoing monetary experiment, hence a useful leading indicator to other CB's actions.
Re: Tokyo, of course - embarrassing to admit Shinjuku station with its 8 MM daily commuters has always seemed cleaner to me than my living room.

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Leftback
admin
September 14, 2016 at 2:45 PM ×

It's quiet suddenly. Op Ex looms, tiny punters buy the dip, unaware of large macro rip currents ("BoJ? What's all that then?"), and the Spoos drift up listlessly. LB remains bearish but took his bag (the well-stuffed one marked "SWAG") home yesterday lunchtime. We have a few small things on here in case of an apocalypse, but basically we don't expect to smell napalm in the morning for a few days.

MM, this would be a good week to get a subscription from me... :-)

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checkmate
admin
September 14, 2016 at 2:59 PM ×

Your greatest risk is simply over staying your welcome in an overcrowded market ...that's bonds in a nutshell. Looking back it's not that hard to see the risks increasing has more and more people fall in love with a mantra. Doesn't even matter if that mantra comes true. No matter how true for a trend to continue it needs new money to feed it and eventually any asset group runs out of that when you can't find enough new 'believers' ,or greater fools call them what you will.

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Anonymous
admin
September 14, 2016 at 3:48 PM ×

My 2 cents on rates is that real money guys no longer have strong view on duration and strong confidence in central bank anchoring of rates following ECB hesitancy. The lack of the strong view is not consistent with the term premia being offered by the market as being short your bench has much better risk reward than being long from a term premium standpoint. The market would have to regain confidence in central bank omnipotence for the market to continue to ignore the negative term premium and happily buy duration.

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Anonymous
admin
September 14, 2016 at 4:06 PM ×

Hi Macro Man, just discovered your awesome blog within the past few months. As you contemplate the future, will you leave the previous content up? As an aspiring Macro Student, I feel it might be good reading. Also, will you have a student-oriented price for your new blog? Cheers.

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Anonymous
admin
September 14, 2016 at 4:18 PM ×

Agree with your general assessment on overstaying in a crowded market. One indicator I've been watching for a while is bank portfolios - for the past 8+ years they've been positioning their portfolios for rising rates but seem to be throwing in towel out of necessity. Risk management conventional wisdom at banks was similar - rising rates more of a general consensus risk than risks associated with lower rates.

That hasn't turned out very well. Banks currently have a tremendous amount of portfolio run-off that is being reinvested at lower rates and NIMs, hurting bank profitability. Banks increasing 30Y fixed (vs. adjustable rate) and also increasing overall resi mortgage exposure (more on agency side over past few years but hearing more today on loan side).

I'd guess long duration shift has longer to run but certainly want to stand clear of the ensuing mess. I guess commercial could blow first but an extended period at these rate levels increases much higher probability of big ALM mismatch down the road.

I wouldn't say this shift has been fools or believers as much as it's been a direct result of so many believing the curves of the past 5+ years. I think finally outcome is the same though - when it reverses it can become self-perpetuating pretty quick.


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Anonymous
admin
September 14, 2016 at 5:32 PM ×

Nasdaq pushing back up to ATHs, the other US equity indexes will likely follow soon. I wonder how the perpetual bears here are positioned? They have called 10 of the last 0 crashes, so I'm not confident in their predictions this time. It would be interesting if they joined MacroMan in adding their trade PnL to their posts, and we could then see just how much money they would be losing if trading these views for real.

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Leftback
admin
September 14, 2016 at 6:32 PM ×

Anon @ 5:32...

No-one is a perpetual bear, although some people are perpetual tools.... let's increase the quality of the content here, OK?

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Jim
admin
September 14, 2016 at 6:53 PM ×

There's a Bloomberg headline saying that measly 0.85% Libor (3 mo) is hurting high debt cos. Financial fragility squared!!

Some of these guys have spreads of +300-350 over LIBOR on their loan resets

Now add a few rate hikes on this

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Nico G
admin
September 14, 2016 at 7:05 PM ×

you friends downplayed my Libor alert some weeks ago but it was the coal canary to me

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Leftback
admin
September 14, 2016 at 7:09 PM ×

There is a lot of junk debt out there. Of course the same was true in 2006 and it took twelve months for the decline in credit quality to be reflected in price action before the whole house of cards came crashing down, and even then it was another year before equities were forced to catch up/down. Pain has to be experienced and communicated before that can happen.

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12yo HFM
admin
September 14, 2016 at 9:18 PM ×

From The Fly (ibankcoin):
All of you know that I hate rigged markets and would like nothing more than to preside over the complete destruction and annihilation of stocks, taking with it all of the morons spinning themselves into knots–trying to figure out this yarn. But, I do believe a trap is being laid bare, ahead of the Fed meeting. They will not hike and all of this worry about a hike is nonsensical rubbish. Upon learning the Fed will not hike, I expect the market to rejoice and subsequently decapitate all of the head of those short.

Quite.

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Nico G
admin
September 14, 2016 at 9:22 PM ×

the Fly has been wrong so many times, like most of us

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12yo HFM
admin
September 14, 2016 at 9:24 PM ×

@Nico - You're right ofc, but this time I'm agreeing with him, and so the prophesy will come true ;)

PS You still good to lend me $100K if we break thru these lows?

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Mr. T
admin
September 14, 2016 at 10:02 PM ×

It's been a really long time since the fed led the markets anywhere. I believe lots of market participants mistakenly see post-FOMC rallies as proof of central bank support - its more likely that risk premiums slowly build in anticipation of any scheduled event, and upon announcement the risk premiums revert. Maybe this is the same thing, I don't see it that way. With fed-funds-futures showing 20% chance for sep hike (a pretty decent chance relative to past events), irrespective of the meeting outcome thats a pretty chunky bit of ERP that goes away instantly (if my hypothesis is not all garbage).

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Anonymous
admin
September 14, 2016 at 10:19 PM ×

WSJ "... the typical male full-time worker earned around $150 less last year than in 1998, after adjusting for inflation. (…)

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Anonymous
admin
September 14, 2016 at 10:23 PM ×

WSJ: Median household incomes stood 1.6% of the 2007 level and 2.4% below the all-time high reached in 1999

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johno
admin
September 14, 2016 at 11:56 PM ×

Still inclined to think EM bonds are interesting, in particular EM local bonds. Ambivalent on the FX risk though, so might look to hedge that away, i.e. most interesting as a rates trade. EMB is hard currency sovereign EM bonds. Different risks there. Perhaps interesting for non-specialists like myself, who have read less Fabozzi than 12yoHFM (though mostly because his books are utter crap), there's a decent pickup from cross-currency swapping most hard currency bonds into fixed-coupon local currency assets. Maybe doesn't compensate for the higher risk of defaulting on hard currency rather local currency bonds (not to mention credit risk on the cross-currency basis swap) in all cases, but some are pretty attractive. If you were bullish on South Africa (wish I were, but this Zuma-Gordhan thing is problematic), this would be an interesting strategy.

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Macro Man
admin
September 14, 2016 at 11:59 PM ×

@ johno, maybe try Ghana? ;)

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johno
admin
September 15, 2016 at 1:32 AM ×

I'll look into it, MM. I recently procured a wall map of the world for my home office, so I'm feeling I could work up an authoritative view on Ghana with five minutes of "work." Ten tops!

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Macro Man
admin
September 15, 2016 at 1:39 AM ×

Dunno man, I think some skepticism is warranted. I mean, when most countries worth investing in have a military coup, it's led by a general or something. Hell, even Qaddafi was a Colonel. Ghana, on the other hand, was ruled by a mere Flight Lieutenant for decades. Penny ante stuff if you ask me, mate.

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Fired Macro PM
admin
September 15, 2016 at 3:10 AM ×

Never pulled the trigger last night on Spooz (long). I just didnt see the price action that I would want to leg into. Instead I just sat on my hand all day last night and today.

But tonight feels a bit different. Asia opened about two hours ago... and..You know how you get this "feeling" after watching/trading the market for some time? Im getting that vibe once again, and I think we are in for another ugly day across all class.

Weak unemployment print for AUD and not so hot GDP print for NZD makes either one a decent short for the night and into tomorrow as upside is genuinely capped for any crazy reversal (which I doubt is even in the cards for tonight).

I'm shorting Spooz here at 2110 and lean on NZD at 0.728 and AUD at 0.746.

I think everything is about to take another leg lower in the next 24-48 hours. Buckle up folks.

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MrBeach
admin
September 15, 2016 at 5:40 AM ×

IMHO - with Trump's chances rising in the past few weeks and Clinton on the back foot, there is absolutely no way the Fed raises rates before the election. Not one iota of a chance.

I do not know what particular argument they will make to hold steady, but whatever position they take will imply to the tea-leaf readers that if Clinton wins, a rate rise is on for December.



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checkmate
admin
September 15, 2016 at 7:05 AM ×

"WSJ "... the typical male full-time worker earned around $150 less last year than in 1998, after adjusting for inflation. (…)"
So globalisation was a massive success for capital investing in growth ex US/Developed and a bust for labour in the West. Cue global rebalancing and political dissatisfaction with all the aforementioned and associated concepts like immigration.
Happy people don't vote for extreme political change or applaud when others shoot the establishment in the street. It's just a signal that goverments have made some very poor choices. Unfortunately, the more you look at Brexit the more you see how intolerable it will be for the EU to see the UK make any success of 'independence'. Success would be a clear siganl to other anti EU factions to emulate the UK. This is what frightens people like Juncker. There was a time I thought Trump was going to be nothing more than a joke. I am beginning to understand why despite my personal dislike of the man that is not the case. He is symptomatic of the same kind of dissatisfaction that we already see elsewhere and I suspect that unless he makes some idiotic moves he's going to be a bigger threat than I thought. Cue markets front running with that this Autumn which makes me think that any face ripper post Fed release might be a fade for risk.

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