As we discussed in our latest video, given our US inflation/growth views, it is very difficult to be structural Treasury bulls. However, in the last nine months, losses in Treasuries have rivalled those at the beginning of the Volker era in 1980. Therefore, there is no question that some of this is in the price. This, in turn, led us to expect a time and price consolidation in the long end of the US curve. Such a move would allow the RSI on our futures chart to recover before it got slapped again this summer by the tail end of the inflation hurricane!
In January, we highlighted the inconsistency of US interest rate futures pricing and suggested shorting ED11s (“MI2 Trader: Eurodollars Timber?” 12th Jan). At the time, the logic seemed pretty straightforward: Ultra-accommodative monetary policy and multiple large fiscal packages. These, together with vaccination programs and perhaps the largest ever inventory cycle, seemed likely to unleash the greatest wave of aggregate demand since WWII. The icing on the cake was that it was set to run smack bang into bottlenecks in global supply chains, which would turbocharge the inflationary cycle, testing both markets and the Fed.
- The current macro backdrop looks more and more like the late 1960s
- Policymakers believe inflation is contained, but markets are rightly worried
- This is beginning to show in the correlation between bond and equity prices
- If current pricing is sustained, it would mark a profound change for markets
Please see our latest video, in which we set out our roadmap for the rest of the year.
24th March 2021 Summary Triffin’s dilemma reminds us that domestic & international goals may be inconsistentUS yield curve steepening is increasingly putting global markets under strain The Fed’s trilemma is whether to set bond yields, equity prices or the dollar Ultimately, the Fed has no choice but to let the dollar take the strainAs you know, we […]
March 19, 2021 BoJ Widens 10-Year Trading Band, Eliminates ETF Purchase Target, Lays Groundwork for Deeper Move into Negative RatesBoJ Widens 10-Year Trading Band, Eliminates ETF Purchase Target, Lays Groundwork for Deeper Move into Negative Rates The Bank of Japan ended its two-day Monetary Policy Board meeting Friday with several modifications to current monetary policy. […]
March 16th, 2021 Summary Fixed Income vol events or bear markets tend to share key characteristicsA steeper yield curve will usher in higher fixed-income volatilityThe 1994 vol event was not a one-off but a steady escalation of pressure on rates and volReal rates and vol are mispriced, but the bubble is in tech stocks – […]
Comment Given our bearishness on Treasuries, it only seemed a matter of time before the dollar started to strengthen. Indeed, as far back as January, we flagged that, on the Renko chart, EURUSD was a sell. But more importantly, there was the potential risk that together with higher yields (the first shoe), a stronger dollar […]
24th February 2021 Comment For the last few months, buffeted by opposing forces and overshadowed by volatility in other markets, FX has been pretty dull. Yet, with the equity and bond moves starting to accelerate, we think the odds are building that FX may be about to join the party. In particular, USDJPY is starting […]
24th February 2021 Comment For almost a year, we have been unapologetic inflation bulls, and because of the direct correlation to CPI, we chose to play this view via 5yrs breakevens. (“MI2 Chart Point: Watch Inflation” 24th March 2020). However, we understand that for practical considerations such as liquidity, those of you who followed our […]