Bond market veteran: +25yr on sellside & buyside focused on rates, credit, USD funding, Fed & global macro. My tweets are opinions, not advice! RT≠endorsements!
It’s about to get Real (real fast)…
The chart below shows the 10-year real rate and real effective Fed Funds Rate versus the 10-year average of annual U.S. labor force growth. Historically, the Great Moderation (1985-2020) came with declining inflation and 10Y real rates…
Reasons to buy? Take the following with a grain of salt as I'm a bond guy, but I felt compelled to build a stock chart on how the GFC went down to highlight many failed bailout attempts (and reasons to buy along the way) yet until nearly everyone gave up, a bottom wouldn't form.
So... what keeps the Fed up at night? Price action like today where both bonds & stocks go down...The close will be interesting, and true bonds finally started to rally a bit once stocks took a further plunge, but this is not normal folks!
A LONG THREAD ON WHERE IS THE FED? Many investors are expecting Fed (coordinated or not) to do something soon (perhaps before futures open). There has been a lot of debate that CB easing can't resolve health issues, but they can help sentiment. Here's what may happen next.
1/11
Oh no! 10yr rates are breaking out of the channel that has held since mid-June (and post dovish FOMC meeting too). If we see this go unhinged (i.e even higher rates) it will be a stark reminder for all equity & PM bulls out there that they were just trading lower rates after all!
1/ A QUICK REVIEW OF THE BOND MARKETS: Last few sessions have seen major markets contend with their own set of unique issues but it seems all assets are dealing with illiquidity & correlation breakdowns (within asset classes and on a cross-market basis) what’s going on?
@RaoulGMI
Fed B/S Update: For those following the coil has sprung! A very large $77bn increase in the Fed’s portfolio. It’s a chunky weekly increase, up there since the post cv19 Fed response, and it takes the B/S close to the former high of $7.13 trillion too! New ATH B/S are in sight 1/2
Late Night Ed: Powell's Message to DC, UBI pls?
1.) Its a PR Campaign: The CBS 60 min Powell brought out the more caring side of Fed vs the PIIE discussion was more tough love.
2.) What's his goal? Shift the focus to fiscal side, but why?
Liquidity vs Solvency dilemma... 1/5
#REPO
is down! Meanwhile stocks have stalled along with the Fed's B/S (stuck around $4.1tn). In fact the latest data shows a contraction of the B/S close to -$30bn, mostly from lower repo usage, as T-bill purchases continue at a slower pace. Will stocks end up with a sad face?
Bond market basically bullied them to do an e-cut, expects more ahead, if they don’t the stock market will take the baton and force them to ease further and do a big QE. Perhaps they shouldn’t have hooked all markets on easy money. COVID sadly is the pin.
👇NEW CHART: Recapping last week vs. events since 2018
Weeks can go by and nothing happens and then all of a sudden everything changes. Last week was definitely one of those periods. I probably missed something, see chart for a quick recap of major events vs DJIA price action.
Reasons to buy? Take the following with a grain of salt as I'm a bond guy, but I felt compelled to build a stock chart on how the GFC went down to highlight many failed bailout attempts (and reasons to buy along the way) yet until nearly everyone gave up, a bottom wouldn't form.
🇺🇸Fed B/S Update: OMG, stop the presses, but on the day the stock market had one of its worst days we come to find out the Fed's B/S was up only up $4bn on a week on week basis (I guess the printer nearly did stop). The large decline in repo is to blame, coming off $-44bn... 1/2
CASH STRAPPED WORLD! The one thing we have learned from the sudden stop impact on the economy is the lack of cash in the system. Clearly the Fed is printing up more, but if all that goes back to prop up financial assets, it won't resolve the cashflow issues that will be ongoing.
🚨Fed B/S Update🚨Danger, danger will robinhooders!
This week B/S shrunk -$74bn, largest reduction since May 2009 (when it declined by -$100bn). I knew there would be weeks like this! Main reason is a significant decline in usage of the FX swaplines. See interactive guide👇1/3
👇System reboot? Way too many folks talking about this now, it’s coming, it’s just a matter of time and if it will be by force or by design (I’m banking on design and cooperation given the many levels of complexity and because the alternative would be even more disruptive).
WEEKs=MONTHs Comparison: History doesn't have to repeat (and policymakers are surely trying to prevent it) but it can rhyme. In a continuation of the prior 2 charts, below I blend them, but compare wkly vs mthly data. If we track 08-09, the bottom is still at least a month away.
👇NEW CHART: Recapping last week vs. events since 2018
Weeks can go by and nothing happens and then all of a sudden everything changes. Last week was definitely one of those periods. I probably missed something, see chart for a quick recap of major events vs DJIA price action.
👇NOTE: Expect multiple kinds of 2nd waves (covid, USD, liquidity needs) and new waves (like margin calls, insolvencies, defaults) ahead for markets to contend with👇
🇺🇸FED EASING "INFOMERCIAL-STYLE": I have spent many nights these past weeks brainstorming what could they do next. There's a lot to cover (I will in this thread) but after today's Fed easing action its starting to feel like an informercial clip "but wait there is more"...
🇺🇸 CENTRAL BANK OF THE WORLD? Fed just launched a temporary FIMA (foreign & international monetary authorities, aka foreign central banks) repo facility to help support the smooth functioning of financial markets (and help dollar funding market dynamics).
🧐Rates Reversal With Stocks Down Bigly???
I think mama told us there would never be days like this...
...however they are happening more and more lately!
Fed cares about equity declines, but worries more when rates are going in the wrong direction too. Watch this...
🇺🇸Fed B/S Update: The week we've been waiting for... wait for it... Yes.. its hard to see it in the table, but among the mighty billions/trillions of other assets, Fed B/S now shows they've purchased $305 million credit in the CCF and have spelled out how its consolidated on B/S.
New world order in mkt dynamics as we get historic moves in oil, USTs, stocks & FX. What we just witnessed will leave a mark on charts (data like this quants will omit in future). For now, with futures limit down, market makers get some sleep, policymakers go pull an all nighter!
Houston, we have a problem: Fed/stock bubble deniers were of the view that extra Fed liquidity wasn't driving performance, us bond folks (that track money flows like a hawk) would always find that comical (at least we knew that bonds were held artificially lower in yield via QE).
The Weekly Quill — The Lesser of Two Upheavals
This week, we welcome back George Goncalves,
@bondstrategist
, to delve into The Fate of the U.S. Stock Market
Forget about it, just disregard 2020s credit spread widening, all fixed now. Maybe we can also forget about all those talks of limiting Corp stock buybacks & redirecting funds into human capital & jobs too! Bailing out financial engineering to boost FCI has a date with solvency.
🇺🇸Fed B/S Update: Another week, another decline in the B/S, this time a large chunk of $88bn came off as of Wednesday2Wednesday levels. Repos, once a main growth area and source of liquidity, are now basically gone and swap lines keep rolling off. Other facilities growing slowly.
🇺🇸Fed B/S Update: Another week and another deceleration in Fed activity (up just $66.7bn, a fraction of peak flow) and NO credit ETFs on the sheet yet. Everything is slowing, slowest swaplines (up only $5.9bn), UST buying still majority of growth ($48bn w/TIPS) and PPP up $10bn.
The Fed can buy up corporate bond ETFs and thereby prop up prices of corporate bonds, but what happens when there are defaults and the artificial Fed price is replaced by the recovery value?
👇One of life’s biggest mysteries, lack of inflation! I agree with
@dlacalle_IA
👇but still folks conflate/confuse QE reserve growth as inflationary (and its what CB want you to believe so that traders keep pumping in marginal dollars to bid up assets while CB starve us of yield).
👇if the bond market doesn’t react to supersized surprise index moves (and actually rates grind down the other direction) then you need to respect it as if it knows something is up just like stocks investors failed to see 4q18 & 1q20. Good charts
@BittelJulien
&
@albertedwards99
Well said, Albert. Despite the US CESI going atmospheric, US 10Y rates are only up 4bps on the move. A peak >50 generally corresponds w/ falling bond yields. The bond mkt always knows best & it’s no different this time. Brace for lower yields in H2 as macro begins to disappoint.
The USA never shrunk its way to growth, its an oxymoron! US needs to reward capital and savings not emulate failed CB policies of others! I will take more QE any-day vs NIRP!
#saynotoUSNIRP
Fed B/S Update: With the swap lines nearly unwound and the B/S clearly north of $7tn we are getting close to the point where the natural ongoing buying of USTs/MBS will eventually push the B/S size to new all-time highs (roughly just $80bn away). Maybe we hit it by Election Day.
Wow 20k followers! So honored and thankful 🙏 A big thanks for all the new followers and for all my friends, investors and reporters of yore. Let’s keep it up as we collectively try to make sense of the nonsense!
MBS spreads are too darn high! They are off the widest levels, but remain elevated and hint at frictions remain in the system. So when Powell says things aren't fully back, its this and not just credit spreads (but that is the real l/t concern for them) that they fret.
@SoberLook
👇Timeless Podcast (but time might be running out if the global monetary reset is close).
@LukeGromen
provides great background here and
@nlw
is a master interviewer who is clear, fair and balanced. This one of favorites encourage all my followers to listen and follow these guys.
The post Bretton Woods money system is starting to emerge, but how did that system come to be in the first place?
@LukeGromen
gives an absolute masterclass in the history of the USD system in this
@BreakdownNLW
Encore Episode.
Fed B/S Update: WATCH THE PUMP, reserve pump!!! A minor contraction of $2.7bn for the total portfolio but all the action is on the liability side. TGA dropped nearly $90bn but bank reserves popped $110bn (last pop like this was week of Oct 7 & stocks rallied for a few more days).
Jeff highlights the most important point why today was just a dress rehearsal and that the supersized repo ops is more optics than actually new liquidity. Watch tomorrow like says below, either folks are chasing down collateral and/or they don’t have enough paper to post to Fed.
So, the Fed offers $500bln repo facility, 84d maturity. Bazooka, right?
Total bids: $78.4bln.
Markets totally unimpressed, so it isn't like there wasn't demand for liquidity.
Maybe dealers don't have the spare collateral? Find out tomorrow, another $500bln 84d on offer.
WTH: If you are dazed and confused like me after the sharp drop in 10yr rates (beyond what makes sense unless 4 trln QE is next) singing this may help. 83 basis points on the wall, 83 basis points, if one of those basis points should happen to fall, 82 basis points on the wall.
FED SELLING? How about this for a headline/idea - what if the Fed needs to start selling its Treasuries to slow down the rally as more QE into USTs won’t stop this move or steepen the curve right away (and similarly they cannot do YCC if markets pancake all rates first). Yikes!
No wonder chair Powell did not sound concerned about year-end liquidity - as per Bloomberg breaking news - Fed plans $365 billion of term repo ops to provide funding through January. Story to follow.
Signs of PPT-lite now too? Hey
@DiMartinoBooth
looks like there are proxies everywhere! According to this table and story some of the fiscal stimulus may be going to boosting stocks after all (may explain all the small size trades and low volume trading).
📉I'm just a bond guy living in an equity-focused world...
But think this was 4th worst daily decline for the SP500 on a Fed day going back as far as I can! And for a nonevent Fed meeting (especially compared to those dates on top 5 list) this is categorically not a good look.
If you can tell from my tone, this troubles me, so I went back and looked into this, we have never had a 50% change in 10y yield levels in either direction over a 2-wk window. We have had larger rallies (yup in 4Q08) but nothing comes close to cutting rates in half this fast...
👇The world may be artificial, at least when it comes to what drives markets, but
@ParrillaDiego
is the real deal!
Highly recommend this interview with
@ErikSTownsend
who has always had great guests, but the recent string have been top notch, all of them super relevant topics!
MacroVoices
@ErikSTownsend
&
@PatrickCeresna
welcome
@ParrillaDiego
to the show to talk about what the inflation trend means for bond yields, equity markets and commodities, as well as gold, the VIX, & much more.
🇺🇸Fed B/S Update: 2nd week in a row of a slowly shrinking B/S, down only -13bn vs last week's -74bn. The declines again were largely as a result of reduced FX swapline usage (down -78bn). The SOMA book (both USTs & MBS) was up 53bn, the difference was scattered in the facilities.
👇This idea by
#Fed
chair Powell will likely mark the beginning of the end of the risk market top, in the future will be compared to Bernanke’s comments that “We've never had a decline in house prices on a nationwide basis” months before it all started to unravel.
@DiMartinoBooth
A question to Chair Powell.
When you argue that that the 'equity premium' (stock prices vs. the "risk-free rate") makes stock appear "cheap", do you consider where would it be if the
#Fed
would not be pushing yields to extreme lows?
Does a word 'bubble' come to mind?
👇ALL ABOUT THE CURVE: If bond yields are the arbiter of the truth, the curve is the enforcer. Fed used precious ammo in an overleveraged world that wasnt allowed to adjust 3 times in a row (2018 credit crisis 1.0, 2019 repo crisis, 2020 Cv19 crisis). Fear a double dip recession!
Late in the cycle, yield curve inversion tells you the economy is likely headed for recession...
But historically, it’s always been the steepening to watch out for.
There’s a big diff. (post inversion) between an 80bp & a 200bp+ rise.
Today we’re at a critical juncture.
👇What are gov't bonds telling us?
Thx
@GeorgeGammon
for having me on, it was fun!
We cover a lot of ground on the Fed, supply, inflation, curves and where 10s may be heading. So check out the video.
BONUS: below are quick explanations to some of the charts and new ones. 1/5
NEW INTERVIEW!! Incredible insights YOU NEED to understand what the future holds for rates and what it means for economy, stocks, bonds, gold! 🔥
George Goncalves (What Is Yield Curve Telling Us? Deflation Or Stagflati... via
@YouTube
Thx
@bondstrategist
DEFCON Update1: Clearly there is hope that the recent actions start working to calm markets, but now that the Fed has used up nearly all of its 2008 playbook, what do you do as an encore (esp when even govt bonds are under pressure)? You take a page out of Japan’s playbook, YCC!
The past four days have seen the biggest strengthening of the dollar versus its peers since the March turmoil, as measured by the Bloomberg dollar spot index.
👇Go big or go home? This is what happens when each time CBs inject liquidity, they need to keep upping the ante to keep momentum in an upswing. When liquidity matters more than fundamentals, after +2 years of pushing stocks to ATHs, what is left is an empty tank!
@DiMartinoBooth
CBs will do "whatever it takes" as will govt but difference now vs. last decade of juiced up equity performance is a) they go to battle with less ammo, b) they can print money but not earnings, c) if jobs vanish a tax cut does not work. The true test of BTD on CB hope lies ahead.
👇One of the most under appreciated concepts...
QE in theory has no limit but an economy and the banking system need to eventually grow into it. And if not sometimes there is just too many reserves/deposits at a given time. Its why many think QE is deflationary, no its stifling.
@corsola26
@bondstrategist
@siddiqui71
Banks are now mostly unable to expand their balance sheets, especially having to absorb billions of dollars of reserves month after month.
#MMFs
and other non-banks have to absorb the load now.
🇺🇸Fed B/S Update: Wow slowest weekly activity since early March (B/S up only $82bn vs avg. $200-300bn a week for most of April)! UST SOMA buying slowed to half-speed and FX swap lines up again to $439bn. PPP facility the only new liquidity program really being tapped (now $20bn).
USD Swap lines - How big can they get? In 2008-9 these things got up to roughly 25% of the size of the Fed's balance-sheet. Currently they are up huge on the week ($200bn-ish) but only make up 4% of the Fed's B/S. These could be $1.5-2tn easily if Fed B/S keeps growing in size!
Fed liquidity tide has gone out to sea? I think there has been confusion about "net liquidity" on a relative basis, where the Fed is buying versus Treasury issuing. This chart and my
@Macro_Hive
report attempts to cover this with market implications ahead.
On the second day of the risk-off in stocks bonds joined in the downdraft, so let’s not forget the huge move in US 10-year yield on Friday. If this were to continue, stocks would come under even more pressure IMHO. Fed likely has a plan B for upcoming mtg!
Fed minutes: On the surface they sound like the typical dovish speak of late, under the surface they are scared of 2013 taper tantrum and are still brainstorming on if or when to do further easing (makes December less likely unless things go pear-shaped quickly).
@DiMartinoBooth
@NorthmanTrader
look at it versus velocity it shows the financialization of the economy (more like suspended animation helped by QE) compared to natural world that existed preGFC where growth in velocity of money was driving banking activity and eventually real profits for firms.
Fed B/S Update: Its too soon to say the temporary B/S shrinkage of late is over, but this past week we had the first increase in weeks as overall B/S increased by $37bn. The majority of this increase was due to the traditional QE, I mean "market functioning ops" in UST & MBS. 1/2
Fed B/S Update: Its starting to get interesting again. An ATH B/S is up ~33bn via UST/TIPS/MBS purchases however there was also tapping of the discount window primary credit, its minor, but up for a few weeks to $2bn. The PPP facility also has increased over the last month. 1/3
👇I have made everyone that I care about (or more like they put up with my never-ending obsession with all kinds of financial plumbing) watch this video👇before and now that I am reminded by
@scientificecon
of the documentary link, you should all too!
Added benefits of new QE, I mean organic Fed B/S growth, is they add back reserves while re-stocking their portfolio with short-term Treasuries (T-Bills). Fuel for next operation twist 3.0 and while we wait maybe re-steepen curves and keep Treasury collateral out of the streets.
Fed B/S Update: About 6bn decline this week as a large chunk of swaplines (17bn) came off, otherwise very little credit use vs. std. pace of UST/MBS buying. FWIW Fed's B/S has been hovering around the same levels for 4 months now. Meanwhile TGA cash had a big decline (over 80bn).
THE FED & RATES MELTDOWN: There has been plenty written over the last 24-36hrs, here is my 5-cents on the shock & horror. Yes, the Fed delivered the emergency 50bp cut that I was expecting, but it didn’t instill confidence in either the rates market or equities. What gives?
1/5
Fed B/S Update: Two things. One, the B/S is solidly back over $7tn. Two, basically one year ago today was when we got the repo mania spike. It was the event that started the journey to ever increasing Fed B/S sizes. Net net, its been a long year and they feel tapped out for now.
🤿Submerging rates = submerging banks? This is what CBs have yet to realize for last decade or so, a vibrant economy (and a chance at a strong recovery) needs to have the commercial private banks in a position of strength. This is your banking system fearing more reserves & nirp!
When the yield curve feels like a big pretzel🥨twist, the siren calls to make it all better (or like pleading to "do something") garners hope of Fed interventions, with the latest being talks of bringing back operation twist (it was always an option btw).
Fed B/S Update: Do not get fooled by the slight shrinkage from the prior ATH in the balance-sheet this week. Its due to the ebb and flow of their MBS portfolio. In the coming weeks they will be back to help make another portfolio ATH. The trillion USD question will it be enough?
🇺🇸Fed B/S Update: Another week of B/S math twister as we are in a period where the new liquidity programs come online. Headline number show the B/S up $67bn, but its smaller than that once you net out new capital from Treasury, for example muni buying has begun in MLF and 1/4
👇great chart by
@AndreasSteno
& a reminder that each time rates rally lower and debt loads increase the hurdle for when rate levels matter also decline. So 3% in 2018 led to q4 risk-off and now anything near 2%, esp in a quick rise up might serve as the pin-prick too. Stay safe!
that tax hikes would be bad idea for that recovery, Powell's sent a message to DC, do more ongoing transfer of funds to citizens/small biz vs just loans and the Fed will finance this UBI-lite (🧐digital USD pmts). It could be tied to a metric they need to hit.
@DiMartinoBooth
5/5
📈 30yr Reals: Break on Through (To the Other Side)
One by one they fall, or more like rise above zero!
While everyone is watching 10yr USTs come into resistance, the real story is TIPS, watch this space.
And now try to get The Doors out of your head!
Retail sales craps out and the bond market barely cares?
This will fall under the bad news is good news category again and given its Fed day... if rates keep leaking higher that might get chair Powell's attention. Real-time CB policy making ahead folks, will they panic on this?
Will be going through all of the details, but the big one, that I have been championing for was collapsing discount window rate to Fed Funds. And as you can see from the link, at the discount window you can post CREDIT.
This is huge for corporate bonds.
Fed B/S Update: Pretty quiet as the B/S grew ~$6bn this week. Even on the liabilities side no major changes. Treasury is looking to scale back T-bills, so going forward TGA will need to decline faster to hit their targets. And keep an eye on RRP. Net its early days for the flood!
Spot on again
@dlacalle_IA
and this game of liquidity wac-a-mole can only go on so far until it pops out for good exposing the fragilities of these new forms of inherent leverage that keep getting embedded in the system. Before it was leverage that did us in, now it will be both.
The Repo crisis tells us a lot about current markets: Liquidity is much lower than estimated and leverage is much higher.
The Repo Crisis Shows the Damage Done by Central Bank Policies
@mises
👇Watch the Yen and not just USD weakness in isolation, if the currency of the one country that invented QE (and printed more fiat units than most) and suffers from deflation starts to rally that is indeed a bad sign! Robinhooders watch FX too!
The yen going up (helping EUR lower DXY) is actually the opposite of the falling dollar. Rising yen is bad dollar, rising dollar stuff. With JPY moving up toward the 104 range again, that's a *bad* sign - not reflation, falling dollar, inflation sign.
👇But the lesson from Japan is that one can’t inflate your way either! All about helping everyday folks but there is always a price tag. They’ll scare you in to dependency, but if they had let market forces work for last 20yrs we would not be this fragile or hooked on easy money.
Neel Kashkari: The lesson of the last crisis is to err on the side of being too generous with government money. Aiding some businesses that don’t really need it is “better than taking a decade to rebuild the labor markets."
RIP bond bull run? Not so fast! I'll say this, I respect that conditions are there to break these channels, but its really 2021 or never. Otherwise we go the way of Japan = rates trade sideways. Meanwhile 10s rarely go into upper band of this channel unless the Fed is hiking! 5/5
👇Take note, but I would add the true test will be when we see (I know nobody believes it, but feels close) a stk mkt correction, do bonds rally and provide a hedge. If so great, if not those expecting Fed to buy stocks (low prob) will be instead buying tons more USTs than March!
👇Missing Piece on Inflation! So Fed tries (partially via TIPs) to keep inflation expectations up, looks other way at s/t usd weakness and perhaps some at Fed want ability to compete with banks (and usher in CBDC) but it’s private banks that create/circulate USD!
@DiMartinoBooth
I'm setting up the site and other ways to interact in the near future. At the moment I only have listed some of the videos and podcasts I was on. If you are interested in getting on my email list for future content go to the site and send me an email. Thx!
Fed slows UST buying further. Its a sign of success for them but likely a disappointment for broader markets! That said they are still doing roughly $160bn a month but its down huge from the start when it was $75bn a day!!! The Catch22 is to spike the B/S credit needs to blow-up!
Fed B/S Update: A ho-hum week for the asset side of the balance-sheet as it inches up $26bn to a new ATH of $7.72t. Even the categories in focus on the liabilities, reserves & TGA activity, saw small moves vs recent history. However the "other" bucket once again pumped up $100bn.
@DiMartinoBooth
Recall that the Fed was a key support of USTs during the 1960s into the 1970s, even after the closing of the Gold Window by Nixon. Mid-70s actually marked the high print of Fed ownership of total UST holdings post WW2.
See one of my favorite charts, it tells it all in one go!
👇Who is right, stocks or consumers? IMHO the latest levitation in risk assets has more to do with investor confidence that CBs have the markets back (more so than actual belief in a robust/sustainable rebound). Meanwhile the consumer knows its a k-shape recovery!
@DiMartinoBooth
Conf. Board Consumer Confidence is currently 53.1pts off its 24M rolling highs after peaking in Oct ‘18. The current disconnect w/ US equities is the widest it’s been in almost 30Y.