They say haters gonna hate and due to holidays and delayed release of CFTC data which is now being digested in its delayed glory, and in concert with many VIEWS out there which all draw same conclusion — higher rates are the only option — I thought a few quotes and visuals might be in order.
First, a stock vs flow argument from BBG view columnist, Marcus Ashworth, and his latest view of 2022:
The gravy train is slowing and it won’t be as easy to make money anymore. Plus a selection of the columnist’s best work in 2021.
…Now, it’s the turn of the developed world to start taking back the largess. Indeed, not adding any more QE is in itself a shock to the system. It will be bumpy.
If the U.S. Federal Reserve does raise rates in 2022, which looks increasingly likely, and bonds vote with their feet by rising in yield, this could provide quite the headwind for further equity gains. Suddenly, there might be a bit of competition on the block after a 20%-plus gain in the S&P. As bonds and equities both went higher in price with quantitative easing, it follows they could go down together too when the music stops. Yet the longer end of the U.S. yield curve is not pricing in rampant inflation. It’s quite the reverse, actually, being more fearful of recession. Something will have to give. If history is any guide, it will be ambitious central bank hiking plans at the first sign of an equity rout. Don’t run for the hills yet: There is still a lot stimulus in the system. But this will be a harder year to make money. The gravy train is slowing…
Emphasis mine and indeed it — the gravy train — is.
The assertion that IF official front-end rates go up THEN the term structure will ALSO ‘vote with their feet by rising in yield’ and this, I believe, speaks to the aforementioned haters.
It ALSO speaks to those without longer-term market experience WHEN Greenspan was in fact raising rates and the term structure was NOT voting with its feet as Marcus suggests it will.
I don’t know Marcus — seems like a nice fella — and he has the Bloomberg view column not I but … Conundrums in markets aren’t new. Neither are haters who are going to hate.
St Louis Fed: Greenspan’s Conundrum and the Fed’s Ability to Affect L/T Yields
Bloomberg: Greenspan’s Conundrum Has Returned to Haunt Markets
…Highlighting the COTbonds data is the sharp drop in the 10-Year Bond futures. Speculator positioning in the 10-Year has fallen for two straight weeks and last week’s sharp decline marked the largest one-week fall of the past seven weeks. The weakness in speculator sentiment has pushed the current level (-339,299 contracts) to the most bearish level of the past ninety-seven weeks, dating all the way back to February 11th of 2020. The 10-Year contracts have also fallen into a bearish-extreme reading in the speculator strength index with a score of 19.8 percent (current level compared to past 3-year range, with below 20 percent equaling an extreme bearish score).
…10-Year Treasury Note Futures:
The 10-Year Treasury Note large speculator standing this week reached a net position of -339,299 contracts in the data reported through Tuesday. This was a weekly fall of -65,443 contracts from the previous week which had a total of -273,856 net contracts.
This week’s current strength score (the trader positioning range over the past three years, measured from 0 to 100) shows the speculators are currently Bearish-Extreme with a score of 19.8 percent. The commercials are Bullish-Extreme with a score of 93.4 percent and the small traders (not shown in chart) are Bearish with a score of 24.3 percent…
Check out the entire site for positions in ALL contracts and more context. For another sort of framed reference, check out Hedgopia who shows,
Finally, from a large German bank who’s a card-carrying member of global Wall Streets illustrious sellside,
Commitment of Traders - Weekly Update (27 Dec 2021)
Interest Rates: Speculators were bearish in Treasury futures, extending their net short positions by 69K contracts in TY equivalents over the week ending Tuesday, December 21, 2021. They added 65K, 7K and 5K contracts to their net short positions in TY, FV and WN, respectively, while boosting their net long positions in TU by 34K contracts. Specs sold 92K contracts in Eurodollars, increasing their net short positions for the third straight week to 1,815K contracts.
These haters are constantly being fed reasons WHY they should continue to embrace. The positions don’t SEEM extreme enough (yet) to ME but such a position IS developing.
IF/when this crowd is given a reason to either run for cover OR put some hay in the barn (offset other losses? are losses even a thing in this environment?), the move can and will be swift.
This is clearly NOT today’s business…Just some food for thought.
