Nice work on Ackbar. I wonder if you might lend some insight/clarity to the last two days. I am trying to understand the psychology of the bond market here. This is a brief detour away from a higher for longer 10 year yields due to the “fear-flight to safety” trade prompting people to rush-in and buy bonds due to echos of a GFC like contagion around the corner? People are thinking the FED will pause or pivot sooner given SVB and the other “dry tinder” ready to burn that you write so well about? The S&P is gonna get hammered like you suspect and bonds are doing what they should be doing... My way of thinking is inflation will not relent near term and the FED will stay higher for longer and rates rise. How can you buy longer duration here with the inflation boogie-man lurking in the closet?
Thank you for taking the time to read and comment.
I think it can be helpful to think in multiple timeframes. Near term, the 'short bonds/rates' trade got incredibly crowded - including the CTA positions in the Dodo portfolio, that were down 4%+ Friday. The SVB news could have been a catalyst to squeeze those shorts near term. Looking out a few weeks, I agree that coincident data could continue to support the 'higher for longer' narrative, so if this acute banking issue is perceived to have been 'Bear Stearned,' then we could have one more move higher in rates to make lower highs. My guess is we have seen the peak in December 2024 rates and longer out the curve, but it is a guess at this point- i.e. my process has not yet 'confirmed' enough on the reversal.
Ultimately, inflation data moves more like a rat through a python- just takes time. It is unlikely to move down from here with velocity until/unless we get the teeth of employment decline and credit market seizing up, IMO. Obviously, it is always possible this acute bank situation cascades faster than I expect and those issues emerge quickly, but my guess remains sometime in second half of this year. My current view is that short stocks is a better risk/reward than long UST duration, but it is certainly possible that we do not get one more test higher in l-t yields like I am waiting for to load up that exposure.
Nice work on Ackbar. I wonder if you might lend some insight/clarity to the last two days. I am trying to understand the psychology of the bond market here. This is a brief detour away from a higher for longer 10 year yields due to the “fear-flight to safety” trade prompting people to rush-in and buy bonds due to echos of a GFC like contagion around the corner? People are thinking the FED will pause or pivot sooner given SVB and the other “dry tinder” ready to burn that you write so well about? The S&P is gonna get hammered like you suspect and bonds are doing what they should be doing... My way of thinking is inflation will not relent near term and the FED will stay higher for longer and rates rise. How can you buy longer duration here with the inflation boogie-man lurking in the closet?
Thank you for taking the time to read and comment.
I think it can be helpful to think in multiple timeframes. Near term, the 'short bonds/rates' trade got incredibly crowded - including the CTA positions in the Dodo portfolio, that were down 4%+ Friday. The SVB news could have been a catalyst to squeeze those shorts near term. Looking out a few weeks, I agree that coincident data could continue to support the 'higher for longer' narrative, so if this acute banking issue is perceived to have been 'Bear Stearned,' then we could have one more move higher in rates to make lower highs. My guess is we have seen the peak in December 2024 rates and longer out the curve, but it is a guess at this point- i.e. my process has not yet 'confirmed' enough on the reversal.
Ultimately, inflation data moves more like a rat through a python- just takes time. It is unlikely to move down from here with velocity until/unless we get the teeth of employment decline and credit market seizing up, IMO. Obviously, it is always possible this acute bank situation cascades faster than I expect and those issues emerge quickly, but my guess remains sometime in second half of this year. My current view is that short stocks is a better risk/reward than long UST duration, but it is certainly possible that we do not get one more test higher in l-t yields like I am waiting for to load up that exposure.