Good morning. On the morning AFTER the anniversary of the (2014) yield FLASH CRASH, I thought appropriate to begin with some historical context … and links.
Happy anniversary. Think about how far we’ve come and in the context of the market swings / volatility we’ve experienced over the past couple (days / weeks) months (and quarters).
Officials really aren’t certain what happened in 2014. I cannot wait to see what they think they think about what is going on now.
In the meanwhile, those out there still in the game, running money for a living, are only on the verge of having to explain whatever that was in Q3, as statements arrive and client appointments are booked.
There’s NO doubt there is lot of ‘splainin to do. HERE is a BAML chart from fintwit
From @BankofAmerica Global Research: YTD annualized return for the 60/40 portfolio is the worst in 100 years.
Where all my DOGS OF THE DOW theory and FirstTrust UIT people at? If 60/40 dead and buried … isn’t now the very time to NOT write it off?
OK, moving along then to just a couple / few (ZH) updates after Friday
The kind of moves in rates let alone stocks clearly tells you what you need to know — NOT a functioning market may be an understatement … In fact, the TREASURY market is functioning SO poorly that …
US Treasury Asks Dealers for Views on Buybacks, TIPS Supply By Elizabeth Stanton
(Bloomberg) -- The US Treasury Department’s quarterly survey of primary dealers asks for their views on the merits and limitations of a buyback program for Treasury securities, which the Treasury Borrowing Advisory Committee has recommended considering. It also asks whether sales of Treasury Inflation- Protected Securities should be increased further.
* The department on Friday released its agenda for its calls with primary dealers in advance of the quarterly refunding announcement on Nov. 2
* Regarding a buyback program, the survey asks questions including: ** If buybacks were conducted to support liquidity in off-the-runs, how much would need to be bought back annually across security types and maturities “to meaningfully improve liquidity,” and should they be done regularly or ad-hoc ** If buybacks were done for cash and maturity management, would reduced volatility in bill issuance be a meaningful benefit, and would dealers be able to source coupons near maturity if they were targeted ** If buybacks were funded with larger on-the-run issuance, how should Treasury compare cost and benefit
* Regarding TIPS issuance, the survey asks how the TIPS market has responded to this year’s increases and what factors should be considered
* Survey, as usual, also asks dealers to discuss their forecasts for economic, fiscal and monetary policy and Treasury financing forecasts
Speaking of NOT making this stuff up, being pressed for time (and constantly reminding myself I’m no longer getting paid for this stuff — in fact, I was never actually paid by the word in the first place), I’m going to have to keep this short.
While this weekends update may contain the most important insight of the entire Q3, I’m going to have to abbreviate observations from Global Wall Streets inbox.
But first, before a couple / few topical highlights from that, the good Dr. (Lacy Hunt) is IN — CLICK HERE for the entire note
The good doctor not ONLY references EPBMacros Eric Basmajian but concludes that as long as the Fed remains resolute in fighting the ‘flation and in context of an oncoming recession (not really avoidable at this point), well, Treasuries will once again BE the place to BE.
…Conclusion The FOMC greatly damaged their credibility when they allowed inflation to race far above their target. Sadly, the deteriorating economic prospects are a direct consequence of the Fed’s failure to execute their fiduciary responsibility to the American public. Almost universally, the other members of the FOMC have supported the Fed chair's position that low inflation is of paramount importance to deliver a rising standard of living for all. If the Fed were to abandon its commitment to the inflation target, the FOMC would suffer a major double blow to its integrity, which would be increasingly more difficult to restore as Volcker so cogently argued. Failure of the Fed to achieve its target would also have the consequence of allowing an emergent money/price/wage spiral to become entrenched, causing a dismal replay of the twodecade span from the early 1960s to the early 1980s. The Fed’s mettle will be tested because highly over leveraged institutions will fail as they historically have done in such situations. Bad actors or their enablers should be directed to bring their collateral to the discount window or, if necessary, to the bankruptcy process rather than be given bailouts that have severely widened the income and wealth divides in the U.S. while causing the Fed to sacrifice price stability that's so essential for broad-based economic gains. These considerations suggest that the Fed’s current stance should continue. The long-term Treasury market is in the zone of digesting the rapid inflation of the past several quarters, and future Fed rate hikes. Barring any capitulation in the determination to quell inflation by the Fed, long Treasuries will increasingly reflect the looming recession and its deflationary circumstances.
Making as much or as little of that as you’d like — the ENTIRE note is worth the wait and your valuable time. Once you are done with IT and fully understand the consequences and if still craving more … sorry. I’ve NOT got an entire package of stuff. Instead, here are a few snippets and links (IF you’ve got permissioned from the firms).
First and foremost from THE best in the (rates stratEgery)biz,
In the week ahead, Treasuries will be faced with more external influencez as the market continues to grapple with the uncertainty linked to British bonds and the associated contagion risks. The gilt market has been a driver of moves in US rates throughout the last two weeks and we don’t see that influence fading in the near term. Even if it’s as simple as a period of stabilization on Monday when gilts are faced with the conspicuous absence of the Bank of England’s £10 bn of daily purchases. May we live in volatile times – oh, wait. There remain two sides to the gilt market debate – first, an increase in British yields should (and has) push other global sovereign rates higher in sympathy. On the other hand, the stresses evident in longer-dated gilts reflect the systemic risks from rapidly increasing policy rates that has long been a concern of investors and central bankers alike. Our take remains that an orderly and measured repricing represents the best case for policymakers; regardless of the ultimate outright yield levels.
That said, as a coalmine canary the gilt/linker market is troubling; particularly in light of Yellen’s recent speech echoing concerns regarding liquidity in US Treasuries. Investors have long lamented the strained liquidity in Treasuries that has come to characterize this year’s price action – if for no other reason than it has led to outsized price responses to otherwise benign developments. To be fair, Friday’s higher-than-anticipated inflation expectations print is especially relevant in the wake of the September CPI release, therefore we’re reluctant to put it in the ‘benign’ category per se – but the post U Michigan price action unquestionably reinforced the market’s ongoing inflation angst as the Fed readies to deliver another three-quarter point rate hike.
We remain squarely in the 75 hp hike came for the November 2 FOMC decision and will note that its timing (i.e. immediately ahead of the mid-term elections) all but guarantees the Fed was going to hike in light of how politicized inflation has been this year. The only open question was by how much Powell would hike and the combination of CPI and payrolls has solidified 75 bp. We’re certainly cognizant that some investors are viewing the core-CPI and U Michigan inflation prints as sufficient reasons for the Fed to consider a 100 bp hike – an idea that has yet to be floated with much conviction. Powell’s pushback against prior attempts for the market to force the Fed’s hand toward a full-point hike suggest it’s very unlikely the Committee will cave this round – especially in light of the increase in real yields and the simple fact monetary policy has just recently crossed into restrictive territory.
Traditional logic holds that monetary policy functions with a lagged impact of 6-9 months and when considering real 10-year yields have increased 1.75% since early-August and the Fed’s only just made policy restrictive, our sense is that the fallout countdown clock has just started. Whether the market waits until evidence the over-tightening is clear in the realized data or begins trading from the bond bullish side in anticipation of the inevitable remains to be seen. We’re reminded that the early stages of a soft and hard landing often appear similar; suggesting that if this cycle’s tendency to jump forward to the next narrative continues to hold, equities and yields will be increasingly biased lower as year end comes into focus. The nuance for the balance of 2022 will be that the strain from the Fed’s actions will first be felt in other global economies long before the fallout hits US shores. Hence, our stance that gilts are a warning to others.
Not the end of days. The end of trends. We suggest closing what were two of our highest conviction trade ideas in rates markets this year: our structural US Treasury yield curve flattener and our short duration position in Europe. We think the USD will strengthen further, but the end is nearing.
JEFF: Our Thoughts On The Next Recession: Later But Harder … Treasury: A New Buyback Program? Refunding Preview... Preview
Ok … with that little said and in mind, I’m going to beg another week of patience as week ahead brings a bit more of a travel schedule and instead of chasing youth and D3 football, the week will end with some D1 football as I will be visiting Colorado State in Ft. Collins … HOPEFUL to make it home in time for Thing 3s playoff IF it’s scheduled for SUNDAY. To be determined BUT what I can say right here / now is there will be NO updates after this coming WEDNESDAY and spamification of your inbox shall recommence on Monday (24th).
Moving on then TO the week ahead AND for any / all (still)interested in trying to plan your trades and trade your plans in / around FUNduhMENTALs, here are a couple economic calendars and LINKS I used when I was closer to and IN ‘the game’.
First, this from the best in the strategy biz is a LINKthru TO this calendar,
No you can't make shit like that up. OTR security purchases are not much different than direct buying. The questions posed to the dealers indicate a very defensive strategy. Indicates, liquidity is drying up and Uncle Feddy sees the need.
No you can't make shit like that up. OTR security purchases are not much different than direct buying. The questions posed to the dealers indicate a very defensive strategy. Indicates, liquidity is drying up and Uncle Feddy sees the need.