positions, BULL CASE>bear, stop hunt
bond friendly seasonals (through August, at least), policy error or MBS taper inspired VolMaGeddon, you choose
Monday, July 19, 2021
What’s On My Mind
(bond) Tech check
ReSale TALES
Best bearish bond case …
Seasonals a continued (bullish)offset
… King Transitorian (the visual)
TICS -- some buying offset TO Japan, China, foreign private selling
Free Willy -- a BEARISH bond fairy tale
Well THAT was another interesting day (and week) in bond (and global macro)markets.
Strong ‘flation, STRONG ReSale TALES and changing (official)attitudes, posing challenges TO Transitor’ians and yet, “US 30 year weekly chart once again at pivotal support” as illustrated YESTERDAY.
To be fair, these levels are not owned and operated solely by the likes of CitiFX. I’ve continued to emphasize these PIVOTAL levels each weekend and have been (and will continue to)pass along visuals like the (LINE) just above // and the (candlesticks) below …
I use these to help highlight inflection points and PAIN TRADES as bonds continue rallying into and beyond various RESISTANCE LEVELS, TLINES, fibo retracements, as momentum grinds further into an overbought state of mind.
IF these visuals too busy, another I’ve been and will continue to keep close is this one … a more simple LINE and 50wMA
I’ve highlighted other instances of BULLISH CROSSING of the 50wMA and if yields weren’t so low NOMINALLY and in singularity, this current approach might be viewed as an even MORE BULLISH SIGNAL.
As always, there are more than a couple different interpretations for these inkblot tests -- resistance is near and will be like Kryptonite OR breaks of resistance will bring about an even bigger reflex LOWER (as positions and bearish attitudes and aspirations continue to get cleansed).
In as far as MY interpretation goes, it’s no secret I was (and am) still hoping for some sort of setback (ie bearish STEEPENING) for which to reload and be long duration.
Right. I’m part of the (pain trade) problem, or at least can sympathize with it.
Cannot blame any others out there who hold similar (or differing) views and the week which just passed is a fine example of why …
Take yesterday’s ReSale Tales for example and while the downward revisions DID take some of the bloom off the rose, good data is at least on some level, just that -- good.
ZH: US Retail Sales Surprise To The Upside After Big Downward Revision, Auto Sales Slump
WolfST: Americans Pay More to Get Less: Rampant Price Increases Boost Retail Sales
I’ll address the INFLATIONARY angle of ReSale Tales in a sec but here’s another way to say it VISUALLY -- economic SURPRISES moved out of negative territory in the week just passed.
As you know, I’m fond of saying / thinking nothing without consequence and perhaps the weeks data (inflation and good ReSale TALES) are BEST summarized by this story (chart) from Bloomberg
07/16/2021 10:45:21[BN]
U.S. Consumer Sentiment Slides in July on Rising Prices: Chart
U.S. consumer sentiment unexpectedly declined to a five-month low in early July as mounting concerns over rising prices led to a sharp deterioration in buying conditions for big-ticket items.
The University of Michigan’s preliminary sentiment index decreased to 80.8 in July from 85.5 the prior month, data released Friday showed. The figure was lower than all estimates in a Bloomberg survey, which had a median projection of 86.5. Consumers expect inflation to rise 4.8% over the next year, the highest since August 2008.
I COULD dive deeper (as some did on this weekends Sell Side Observations) and highlight auto and home buying plans buried deep within the UoMISSagain details
High and rising inflation (with stimmy induced spending -- Child Tax Credits hitting, anyone??) is GOOD, for now but simply cannot BE without consequence … Fine, don’t take MY ‘word’ for it, here’s some ZeroHedge snark
ZH: UMich Sentiment Slumps In July As Inflation Expectations Hit 13 Year High
Perhaps this consequence is what the longer-end of the yield curve is ATTEMPTING to price in …
It’s NOT to say that no matter HOW one looks at the data … slices and dices it … it ALWAYS and forever comes up a BUY DIP recommendation.
Free Willy, for example, is an updated monthly missive which lays out case for cheaper / steeper yield curve triggered BY the Fed and specifically an MBS taper.
In fact, for even more context, Barry Knapp was on Bloomberg just yesterday talking about it essentially noting the Fed buying 100% of the NET MBS supply has been suppressing bond market volatility.
He offered some context and an important reminder that 30yr fixed-rate mortgage (prepayments, into LOWER RATES) are THE single BIGGEST source of implied volatility, known to man kind.
The Fed, he reminded, does not HEDGE this risk and has, quite effectively, driven rates vol (ie the MOVE) and REAL RATES DOWN.
With me / him so far?? All makes some sense and sounds about right …
The point here -- his and mine (Free Willy) -- is that WHEN (not if) the Fed stops buying (100% of the net supply) there will be a modern day VolMaGEDDON -- a vol shock that reverberates through global markets.
Jackson Hole is coming and Barry views it as a substantial risk OFF event that creates a DIPportunity (in RISK) and one that can / will / and should be funded by continued selling of USTs …
Rates, he concludes, will simply grind higher. Its a ‘gimme’. There’s simply nothing else to consider. EVER.
HIS views start at about the 30min mark HEREand I can only offer that I’m with him in as far as the shock and a reflex throughout which will INCLUDE USTs.
Free Willy…then concludes a DIPportunity not just in RISK but perhaps in some cheaper USTs, too.
In the MEANWHILE, between now and then (the end of summertime when Jackson Hole confab set to take place) we’ve still got bond market FRIENDLY SEASONALS.
If you haven’t read this one from Ader on the topic of SEASONALS, before today, shame on you (and me). An OpED from Bloomberg:
Opinion
Don't Count Out Seasonal Patterns to Predict Rates
Yields tend to rise into May and June, and drop toward the end of year; 2017 may be no exception.
By David Ader
January 3, 2017, 6:00 PM EST
...From the 1990s to just a few years ago, some of the onus was on the investment behavior of Japan, one of the largest owners of U.S. debt, Japan's fiscal year closes at the end of March, which was accompanied by repatriation of profits -- selling Treasuries -- and investors didn't begin reloading until the period around the U.S. government's quarterly refunding in May. This coincided with the period when investors needed the bonds to ensure liquidity...
There also was a seasonal bias for a pickup in inflation early in the year (companies getting price increases in early to book them for the bulk of the year). As a result, Treasury Inflation-Protected Securities also benefited in the first few months of a given year, with break-even rates -- the difference in yields between TIPS and conventional Treasuries, and an indicator of the rate of inflation expected by investors -- tending to reach their widest levels around May-June and then narrowing for the balance of the year.
Another noticeable factor was that companies tended to frontload bond issues in the first months of the year, funneling more supply into a relatively narrow window before slowing the pace somewhat into the summer and fall...
For some modern day / updated VISUALS, Citigroup strategist (OD) offered these visuals (and you’ll find links on this weekends Sell Side Observations):
In as far as TIPS seasonality Ader mentions, perhaps this year will be different. You know. We’re on the other side of a pandemic, in case you hadn’t heard and so, to look THROUGH details of the inflation data we’ve gotten highlighted this week -- more than ‘one in a row’ so to say we’ve had quite the string of above forecast and ‘target’ inflation levels -- may be viewed as a much needed overshoot after missing to the downside for SO very long … Again, perhaps these are NOT sustainable ‘flation prints and the long bond is sniffing this out.
This, from yesterday’s Odd Lots blog / newsletter on Bloomberg
07/16/2021 15:43:03[BN]
What’s really behind rising inflation
...The other thing that’s worth teasing out is which mechanism is the real driver of U.S. inflation. Some people point to the Fed balance sheet. Others blame deficit spending. Still more say direct paychecks to families or expanded unemployment payments.
But we know that one of the biggest causes of elevated inflation in recent months has been the extraordinary surge in used car prices. Now this isn’t the only category going up, but it’s a big one. Still, it’s very hard to tie any of the four policy areas above to the lack of used cars, which itself is related to the semiconductor shortage and other pandemic fallout.
Yes, there’s more to inflation than used cars. But analysis from Englander at Standard Chartered suggests that if you remove “reopening categories,” inflation looks way more mild.
To be sure, it’s dangerous to use inflation measures that cherry-pick categories, thus allowing some to arrive at an “ultra-super-core-ex-reopening-and-chips” CPI that gives a benign reading. That said, it is important to look at specific categories, since the goal after all is to figure out what’s behind upward price pressure. The right answer, in turn, is what’s needed to formulate policy.
In the final analysis, what seems reasonable to assert is that much of what’s driving headline gains aren’t things with obvious connections to the Fed’s policy or generous unemployment payments...
SO maybe inflation surprises -- contained TO a few categories -- are simply not enough for the long bond to embrace.
Counterfactual at the moment and moving to wrap this weekends note / process of thought UP, I’ve updated POSITIONS report to reflect Friday afternoons TICS data.
Bearish, at first blush where Japan and CHINA both SOLD (again!) but keeping in mind, this was MAY data. When the 10yy OPENED @ 1.6438, traded as HIGH as 1.7035, as LOW as 1.4643 and CLOSED @ 1.5943.
Sell in May and go away? I thought that was supposed to be STOCKS’isms 101? Besides the point that we went from nearly 1.60 to about 1.30 now.
DIPportunities all around. Furthermore, you’ll note a category of much lesser importance, the Cayman Island (think HF hotel) ADDED USTs … So, the covering of some shorts then?
I’ll leave you with updated POSITIONS report as some food for thought.
Best, Steve