'while we slept'; BLK and Vanguard SAY another year of losses for USTs; Hindsight Capital wins AGAIN!
Well, it’s officially the beginning of the end of the year and quite a year it has been. For all of us. As we’re still dealing with the dreaded virus in one way and another, the high/low light for me personally was an extremely tough decision to hang up the independent rate strategy/sales/trading cleats — That’s A Wrap — and to focus on the next chapter in my book!
I hope to continue filling the ‘stack’ here with content and an occasional view (even IF it is somewhat different from those ‘rock star’ / popular kids of The Street).
With that in mind and with a half-day of bond trading and full day of NYSE ahead, a few overnight and opening thoughts as the book gets handed off one last time.
First, from MNI (@534a)
US Stocks Look to Book Annual Gains of 27%
Executive Summary:
Holiday-thinned trade keep volumes muted
US stocks look to secure 27% gain across 2021
CNH the standout in FX space, looks to finish year close to highs
Figure 1: European NatGas prices tumble further as US LNG heads for Europe
…BOND SUMMARY: Euribor futures underperforming SONIA as European bonds closed
With European and Japanese bond markets closed, there have only been limited moves in gilts and Treasuries (both a little higher on the day).
A more interesting dynamic is seen in STIR markets, however, with the Euribor strip moving up to 3 ticks lower through the Greens and Blues. This is in contrast to the 2.0-2.5 tick increase in the same maturity for SONIA futures. There's no real reason for the outperformance of SONIA, other than yesterday's story that the UK government may delay some of the expected rise in consumer energy prices that is pencilled in for April - however that story broke yesterday so it more seems to be illiquid markets exaggerating moves.
TY1 futures are up 0-1 today at 130-14 with 10y UST yields up 0.5bp at 1.516% and 2y yields unch at 0.727%.
Gilt futures are up 0.12 today at 124.90 with 10y yields down -0.2bp at 0.973% and 2y yields down -0.3bp at 0.663%.
UNCH or as a trader I once worked with used to say, aggressively UNCHANGED.
AND it would seem fitting that volumes are somewhat dampened after past couple of days jockeying around for year - end window dressing (and rebalancing),
… Treasuries are little changed with Europe and Japan/Korea all out for year-end festivities. DXY is little changed (+0.07%) while front WTI futures are lower (-1.4%). Asian stock markets that were open (China/HK) did well, EU and UK share markets that were open are modestly lower while ES futures are showing -0.25% here at 7:15am. Our overnight US rates flows were predictably light with our London desk reporting EU real$ selling in the belly alongside some lifts in off-the-run back-end paper. Overnight Treasury volume was ~80% of average overall with 3yrs (102%) the only benchmark seeing above-average volumes …
The commentary reminds us how very far we’ve travelled this calendar year,
… In the few days after the results were in (~January 5th) from Georgia's runoff elections for their two Senate seats, UST 30yr yields briefly hit 1.91% (January 12th). Here on the other side of the year.. 30yr yields are essentially UNCHD from that Jan 12th intraday high yield print …
Finally, the note offers,
… if one traded on the fundamentals alone, we'd guess dissatisfaction on your part too. The day after 30y bond yields first touched 1.91% back in January... YoY headline CPI printed +1.4% for December. Today headline CPI is +6.8% YoY and 30y yields are essentially unchanged from their 1.4% YoY CPI bookend. There seemed to be lots of instances during 2021 where, if you had somehow obtained a tier#1 data release before the markets did, you might have lost a lot of money the day of the release. It's this latter point that resonates the most with yours truly as I look back on 2021 and what characterized the past year versus all the others experienced.
For the technically inclined, 2021's conditions were basically about as challenging as this guy's seen over the past 41 years as a rates practitioner (the 1996-1997 period seemed to have a similar degree of difficulties). It's just tough to tease out sentiment and positioning from the price momentum studies when there was typically not a lot of... price momentum during 2021- except for the usually brief moments of panic. The good news is that 2021 may have set a low bar and 2022 should be better for the trend-following set. The Fed's own bond price controls are finally loosening up and we/others suspect that a potentially critical (for curve especially) Fed decision about rate hikes vs balance sheet reduction looms for the coming quarter. We can dream, right?
The note ends with 2 visuals (5yy and 30yy REALZ both monthly, and here’s 5s,
This one chart influenced our macro thinking more than any other this year. Monthly momentum (lower panel) guided bearishly all year and rates of course rose. And if the shorts/underweight somehow survived the spring/summer corrective range, there might be something to crow about here at year-end. But net of carry and roll, we're assuming that there would be sadly little to show for being bearish 5's except for some bruises compliments of the March-September FOMC rate range. Anyway, 5's are still loosely respecting their pre-pandemic rate range low (1.31%) as a support region while the 2021-long bear move is beginning to look 'mature' from a long-term momentum perspective. The late 2016 sell-off looked similarly mature before a 2017 consolidation which was before a further sharp rise in rates during 2018. So we're braced for anything next year and about all one can say right now about 5's is that the macro bear phase persists even if it looks increasingly extended...
BRACE for any and EVERYTHING … As long as that ‘thing’ is HIGHER RATES?
As far as WHAT NEXT, Bloomberg running with a story about how LOSSES ARE AHEAD in USTs at least if you ask BLK and Vanguard
BlackRock, Vanguard Gird for Another Year of Treasuries Losses
> Broad Treasury index set for first annual decline since 2013
> Bond benchmark has never suffered back-to-back yearly losses
…“Our base case for 2022 is that growth and risk assets hold up and the market gets comfortable with the idea that the Fed tightens after the first quarter,” said Brian Quigley, senior portfolio manager at Vanguard Group. “That is moderately bearish for Treasuries.” Quigley sees yields on 10-year notes rising toward 2%, from 1.5% currently.
…The prospect of rate hikes starting next year has naturally pushed up policy-sensitive short-dated yields. In contrast, both the 10-year note and 30-year bond yields remain below their 2021 peaks, driving a pronounced flattening in the Treasury yield curve. Once the Fed actually starts raising its overnight rate, the flattening trend will remain dominant, but the curve should also shift upwards. “Once the Fed tightens, the curve will bearishly flatten,” said Vanguard’s Quigley.
As I read through THE ENTIRE STORY, I cannot help but think they may LOOK right, early on and that is largely due to SEASONALS. This is NOT something new and in fact, something I’ve often cited. David Ader wrote THIS on them back in 2017
Don't Count Out Seasonal Patterns to Predict Rates
…There is, however, one simple technique that has proved very reliable when trying to provide a year-ahead outlook: monitoring seasonal patterns in interest rates and the yield curve. Simply put, there is a strong tendency for yields to rise into the May-June period and drop heavily into the end of year; 2017 may be no exception.
…Excluding the possibility of remarkable coincidences, what explains these seasonal patterns?
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. This pattern has broken down somewhat in recent years.
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…
I’m NOT asking whether or not you believe in ghosts of bond markets past, I’m simply (re)stating some things which REMAIN factually correct.
The clarion calls for dramatically higher yields may be right this time. They ALSO may NOT. Early on in the year, say ahead of that May - June frame of time - I’d NOT be surprised for those like BLK and Vanguard to take (premature) victory laps but remember, it’s not about how you start, it’s always about how you finish.
Drive for show. Putt for dough.
In closing, I’ll leave you with John Authers annual tradition of looking back at the year that was…with one excerpt hitting close’ish to home
Hindsight Capital Again Made The Year’s Best Trades
What if you could do 2021 over again? This legendary firm has a strategy that beats all others, and always will.
… Long MOVE/Short VIX
Volatility was close to inevitable in 2021 as the world awaited evidence whether it had finally escaped the pandemic. What Hindsight Capital foresaw was the survival of “TINA” — There Is No Alternative. Bonds would grow ever more volatile as inflation increased, but equity volatility actually fell. The more concern there was about bonds, the argument went, the more reason to trust equities instead. The VIX index of equity volatility fell 25% as the MOVE index of bond volatility rose 60%. The rise was bumpy, but by the end of the year a trade of shorting the VIX and putting money into the MOVE had returned 112%.
I’d like to wish you a happy and healthy 2022! Continued success!