I’ve said it before and I’ll say it again. Diversification via USTs as an integral part of 60/40 portfolio continues to make sense and days like we’ve had in the past week are a reminder.
Brings me to something in the inbox yesterday (so, TUES) written about Friday’s low volume risk off BID for USTs and is written by LPL research.
… “Bond markets are on edge right now. With a new COVID variant and potential changes in monetary policy expectations, we’ve seen rate volatility increase lately” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “And these concerns are being exacerbated by poor liquidity in the Treasury market. Unfortunately, that means we’re likely to continue to see elevated levels of volatility in the near term.”
While it’s still too early to know the severity of the new variant and the economic implications, we think the bond market’s reaction on Friday wasn’t solely due to the Omicron news. While certainly serious, the Omicron news was likely exacerbated by poor liquidity in the Treasury market. As seen in the LPL Research Chart of the Day, the Bloomberg U.S. Government Securities Liquidity Index, which is an index that measures the prevailing liquidity conditions in the U.S. Treasury market (higher index levels equal less liquidity), shows that liquidity conditions in the Treasury market are the worst they’ve been since March 2020. As such, we caution reading too much into daily price moves, in either direction, as the Treasury market is currently set up to, frankly, overreact to news flow. We think the big move lower in yields on Friday was an example of this overreaction. That said, Friday’s directional price action within the Treasury market is a reminder that Treasury securities continue to be the best diversifier during equity market sell-offs and they still likely make sense within a diversified asset allocation.
Being without a terminal (and so, access to current LIQUIDITY statistics), I find it interesting when ‘main stream’ outlets (LPL) catch on to how important a turn for the worse in bond market liquidity metrics truly is.
It was only a couple of weeks ago (before losing terminal access), I sent the following note, on November 14th (@ 633p):
Good evening ... HERE is an updated 2pg PDF ahead of the cash UST open with more than a handful of updated links and things for you to consider. Kashkari went on to FACE The Nation (who doesn't know he's NOT a voter) while YELLen says we gotta crush the virus to crush the flation. SO low virus = bullish for long bonds?
There are other clickable links to consider ahead of China data dump tonight (ReSale Tales, Industrial Production) and I have once again posted visual of govy (lack of)liquidity index because I was stunned to see SO much ink spilled on topic from some of the best in the biz ... See this weekends updated sell side observations for more on it AND on 2022. MS, for example, on MACRO, normalizing but NOT NORMAL as training wheels come OFF. Meanwhile on RATES - dealing with LESS EASING, realz to RISE as growth improves, breaks MODERATE, 2s5s and EDU2Z3 STEEPENERS, sell 7s vs 2s20s, stay SHORT 5y TIPS and they see 10s breaking ABOVE 2% by end of 2022. This as the stock jockey sees S&P 4400 by end 2022.
I've updated views (and am quite let down no decision YET on the Fed chair sweepstakes) as well as some technicals (haters gonna hate, see CSFBs new shorts) and sell side observations where 2022 coming into focus.
A few days before (on Veterans Day), I sent THIS:
In as far as markets go, I've updated this 2pg PDF with a few things / links on this Veterans Day holiday and this evenings 2pg PDF leads with a chart and story from The Terminal highlighting, "Liquidity Gauge for Treasuries Worst Since March 2020: Chart".
Bond market LIQUIDITY matters and it even matters TO the stock market, apparently, and those which make a living in the main stream financial media…
Those still IN the bond market and those of us who’ve since moved on ALWAYS knew this … low rates are unfortunately NOT something we can simply wish away … simply say the word NORMALIZE and voila!