Get started

Bonds

5 ways to play the current macro environmentWhy We Rallied It's been a strong few months for the S&P 500, which is up about 13% from the October lows. There were five reasons for the rally: 1) P/E ratios got attractive, especially for small-to-mid caps. 2) Inflation peaked, which historically has sometimes marked the bottom for stocks. 3) Global liquidity turned upward. Every major bond market was pricing a central bank pivot, and the big central banks (particularly Japan and China) added about $1 trillion to their balance sheets. 4) Economic data remained surprisingly strong, which raised hopes of a "soft landing." 5) Possibly there was a bit of forced buying due to a "short squeeze." Why the Rally Is Probably Over However, I believe we've now reached an inflection point where these tailwinds will turn into headwinds. 1) The S&P 500 and Russell 2000 P/E ratios are once again looking high (although S&P 400 and S&P 600 still look cheap). (See this report from Ed Yardeni.) 2) Inflation is no longer surprising to the downside. The last couple prints have been exactly in line with forecasts, and leading indicators of inflation have been creeping back up. See, for instance, this chart of service sector wages, this chart of copper prices, and this Goldman Sachs forecast of crude oil prices. This is partly because of the global liquidity boost and continued deficit spending , and it's partly because of China ending its Covid-zero policy and reopening its economy. (China is the largest importer of crude and the second-largest importer of liquified natural gas in the world.) 3) With inflation set to stay high, liquidity has tightened a lot. The market is no longer pricing a Fed pivot , and analysts suggest the central bank liquidity boost may be over . Stocks have now gotten significantly higher than liquidity measures would predict , which suggests they may need to come down a little. 4) Economic data are deteriorating. Leading indicators have been pointing toward recession for months , but consumer savings and a glut of job openings have helped delay it. We're definitely starting to see weakness, though. Credit card debt has soared to an all-time high , we're seeing more late payments , and the housing market is cooling off fast , with inventories of unused construction materials piling up . We've seen "soft landing" hype before: in 2000 and 2007 , just before those recessions hit. Unless the Fed pivots immediately, it's probably not "different this time." 5) The short squeeze is over for large cap tech, with most of the shorts already forced out. Five Ideas for How to Reposition How to trade a coming recession? 1) The obvious trade is long bonds, short stocks. Bond market valuations are very attractive relative to stocks, with bond yields only a little below the S&P 500's earnings yield, and bond markets having perhaps gotten too hawkish relative to policy rates. Given the historical correlation between 10-year yields and S&P 500 valuations, the gap that has opened between them may imply an opportunity for a statistical arb. Either stock valuations should drop or bond yields should rise. Historically, in a recessionary environment, the bond market has tended to recover first, and the stock market second. So now would be the time to long those bonds. However , it should be noted that this recessionary environment is an unusual one in a lot of ways. Stocks have already sold off a lot, and valuations are pretty mixed. Bonds should perform well if we get a deflationary recession that allows to Fed to lower rates, but a stagflationary recession might force the Fed to keep rates high even as the economy stumbles. Thus, it may be worth getting a little more specific with our trade. Here are some other ideas: 2) Long investment-grade bonds, short high-yield bonds. If recession is coming, then high-yield spreads are probably way too low . It's possible that high-yield bond rates will rise even as investment-grade, Treasury, and policy rates fall. 3) Long high-quality small- and mid-caps, short low-quality large caps. In my opinion, large cap tech is still way too crowded. I wouldn't want to short Microsoft right now, given the success of Bing AI. But I'd be willing to take a swing at Amazon, Apple, and Netflix as long as I could balance the risk by longing some cheap, quality smalls and mids on the other side. In my opinion, the size factor is ripe for disruption. If you'd asked me two years ago, I would have said that AI would most benefit large cap tech. Now I think it will most benefit smalls. What changed between now and then is that AI went from being the exclusive domain of big companies to being publicly available at shockingly low cost. This happened way faster than I ever would have guessed, and you better believe that small, agile companies will capitalize on the opportunities provided by access to AI! 4) Long cash to buy the dip on energy stocks. Energy historically has struggled in a recession, so it's quite likely that energy stocks will see some downside soon. However, the current free cash flow yield on energy stocks is quite high , and the sector trades at 10x forward P/E . Meanwhile, investment in the sector is still much too low . I believe there will be a decade-long structural bull market in energy due to constrained supply, but that there will probably be some recessionary pain first. Meanwhile, money market funds offer a really high return on cash. My Fidelity money market is giving me almost 4%. Ain't nothing wrong with just collecting that money market rate and waiting for energy stocks to dip for the buy and hold. With retail investor inflows at an all-time high , I believe the current market environment offers a good opportunity for savvy bears to execute some well-constructed long-short trades. If you look at how the smart money is positioned, it's pretty much the opposite of retail positioning here. There will be a time to get bullish on US large cap stocks, but we probably need to see some weakening of coincident economic indicators like employment first. (Stocks tend to do best when unemployment rates are high .) Remember, market positioning beats market timing, but ideally you could do a little of both! Thanks for reading, and please share your ideas in the comments below!
NASDAQ:VCLTLong
by ChristopherCarrollSmith
16
2023 Market Projections: Leading Indicators and AnalysisTVC:US10Y The recent market response to data on CPI , PPI, and the selloff in the bond market, coupled with hints from the Fed about potentially raising rates towards 5% to 5.25%, provide important insights into where the markets could be heading in the coming weeks. Looking at the weekly chart of the 10-year Treasury yield, we can see a massive rising wedge pattern with a bull flag inside the wedge . The break out of the bull flag last week has a target of 5% to 5.25%, which aligns with the Fed's projected peak policy and the top of the wedge in the chart. There are some bullish signs in this chart, a hidden bullish divergence on the weekly with both the RSI and MACD , indicating a bullish continuation of the trend. Additionally, there is a bullish divergence on the daily chart , as shared a few days ago. These signals increase the likelihood of a bullish move in the 10-year yield, and if this plays out as projected, it could lead to high selling pressure in markets, including the stock market and crypto. Higher yields can reduce the profitability and spending power of companies and individuals, and make stocks and cryptocurrencies less attractive as investment options. It's important to keep a close eye on the bond market and monitor any potential impacts on other markets. This could mark the final leg down or a bottoming process in the current bear market, with the last leg down typically being a massive one. In the coming weeks, there may be a triple bearish divergence that develops on the 10-year yield, which could signal a nearby bottom in bonds. The stock market is expected to follow suit weeks later. It's worth noting that this analysis is based on confluence and projections around recent developments, leading indicators, and technical analysis projection methods. However, there are no confirmations on many aspects of it yet, and there is always a degree of unpredictability in financial markets. Therefore, it's important to acknowledge the uncertainties and potential risks involved in making projections based on technical analysis . It's also important to emphasize that this is not financial advice, and readers should always do their own research (DYOR) before making any investment decisions. Seeking professional financial advice before making significant investment decisions is also highly recommended.
TVC:US10Y
by ahmad_alibrahim
10-Year Treasury Yield Ready to Extend Advance to 2022 Highs?The 10-year Treasury yield has been rising since the end of January in the aftermath of a Bullish Morning Star candlestick pattern. Now, prices are approaching the December high at 3.905 after confirming a breakout above a falling trendline from October. Meanwhile, a bullish Golden Cross is set to form between the 20- and 50-day Simple Moving Averages, further offering an upside technical bias. Confirming a breakout above the December high exposes the 78.6% Fibonacci retracement level at 4.118 towards the 2022 peak at 4.335. US10Y
TVC:US10YLong
by QM_Dubrovsky
1
US Government Bonds 10YR Yield LONGUS Government Bonds 10YR Yield. Time-frame = 1 month. In 2005-2007 (red circle) - a double top was built (determined automatically by my script) from which the downward movement began for further accumulation. 2009-2019 (green rectangle) - long-term accumulation (balance). 2019-2022 (blue circle) - responsive activity (long entry by key players). 2022-2023 long to the upper limit of the balance. The last 3 months - a retest to one of the key balance levels. 2023 - expect further upward movement towards the 5.000% area (towards the upper border of the double top)
TVC:US10YLong
by ZenFunds
3
US10Y: Short the next spikeFamiliar pattern for the US10Y as with the support of the 4H MA200 it is repeating the mid December +13.50% rise. In perfect symmetry a new +13.50% rise tops on the Resistance provided by the first Lower High of the down leg, same as the November 13th Lower High. The 1D technicals have just come out of neutrality (RSI = 57.935, MACD = 0.009, ADX = 33.193) and an additional short trigger will be the next time the 4H RSI turns overbought above 75.00. Our short term target is right above the Support (TP = 3.340%). ## If you like our free content follow our profile to get more daily ideas. ## ## Comments and likes are greatly appreciated. ##
TVC:US10Y
by InvestingScope
5
Don't Fight The FedOn February 1st, the Federal Open Market Committee (FOMC) meeting minutes were released, and the Fed announced a 25bps rate hike. As such, markets started to rally. An interesting note is that the FOMC meeting minutes and the associated press conference appeared contradictory in nature because there was not a straightforward hawkish or dovish narrative across both. The statement was hawkish. Meanwhile, Fed Chairman Powell’s language in the press conference was remarkably dovish, describing the disinflation process as having started and as “encouraging and gratifying”. This was seen by markets as the signal to continue the recent rally. Precious metals, equities, and risk assets have all seen significant post-meeting relief. The first innings of a recession always appear to be somewhat of a soft landing in which inflation and growth begin to slow gradually. Yesterday’s meeting echoed the ideas that recent indicators point to a modest increase in spending and that inflation has eased, precisely what the first innings of a recession would predict. As markets shortsightedly adopt the soft landing narrative, the Fed’s lack of pushback against easier financial conditions added fuel to the fire. Given this, it is doubtful that markets will stop rallying unless one of two cases occurs: First if data comes in hot, it potentially frightens the market into thinking the Fed will turn back hawkish and raise rates more than the recently observed 25bps hike. The second scenario is the other extreme. Should data start coming in highly recessionary with lower inflation and weak growth, this will eliminate all believers in the soft landing narrative, thus halting the rally. However, at present, it looks like the market rally of 2023 could continue until either of these scenarios happen. An important thing to note is that whenever inflation has exceeded 5% in the past, it has never come back down without the Federal Funds Rate exceeding the CPI . Considering the Federal Funds Rate is currently at 4.65% and CPI inflation at 6.5%, more rate hikes are on the horizon unless data comes in highly recessionary. CPI data on the 14th will provide significant insight into whether or not the Fed will follow the likes of the European Central Bank & Bank of England and go with a 50bps hike rather than a 25bps hike. Another important thing to note is that Apple , Amazon , and Alphabet (the parent company of Google ) all missed earnings last night. If three of the world's largest companies missed earnings, it does not breed confidence in the hopes of avoiding a recession. One thing is for sure, the S&P500 will take a hit when the NYSE opens later today.
Long
by Coinrule
US10Y: Trapped inside the 4H MA50-MA200The US10Y, a major driver for Gold, is trapped inside the 4H MA50 and 4H MA200, before tomorrow's Fed Rate Decision. This shows the market uncertainty surrounding this event as investors haven't yet chosen to pick sides. That keeps 4H neutral technically (RSI = 52.167, MACD = 0.014, ADX = 27.887) and we can only trade this with careful points that will be triggered after a level is breached. A breach over the 4H MA200 is a buy (TP = 3.780 / the Resistance). A breach under the 4H MA50 is a sell (TP = 3.420 / the Support). Carefully sell on tight SL further breaches below the Support (TP = 1D MA200 and Main LL in extension). ## If you like our free content follow our profile to get more daily ideas. ## ## Comments and likes are greatly appreciated. ##
TVC:US10Y
by InvestingScope
4
The Rand in the rocky credit markets The economic calendar is wild this week so I thought it would be best to do a deep fundamental dive into the USDZAR . All the attention will be on the Federal reserve tomorrow and whether or when they will pause their rate hikes. We need to look past the hype around the interest rate and the “pivot" narrative. Focus should however be on how the markets will cope with the Fed’s liquidity drain and how it will impact the future price of money ( ie . Interest rates). Before we kick-off, correlation does not imply causation... I’ll start by explaining the chart you’re looking at. What you’re seeing is the positive correlation between the USDZAR and the difference between the South African government bond 10-year yield (ZA10Y) and the US 10-year treasury yield (US10Y). The interest rate differential is referred to as the carry trade potential. Investors can borrow money on the cheap from developed low-risk markets and invest the borrowed money in riskier destinations to earn more interest. The interest rate difference is then pocketed by the investor. The preferred vehicle to capitalise on the interest rate differentials between two locations are government bonds (they are low risk and liquid). The reason for the positive correlation between the USDZAR and the bond yield differential is because when there is risk-on sentiment in the market, investors tend to move funds out of the safety of US treasuries and into riskier assets. The sell-off in US treasuries causes US10Y yields to rise (decreasing the bond yield differential), and the rand tends to appreciate in risk-on phases of the market, citrus paribus. (Decreasing bond yield differential; USDZAR decrease due to rand appreciation). Conversely, when investors are risk-off they run to the safety of US treasuries. The buying of US-treasuries lowers the US10-year yield which increases our bond yield differential. We all know how rapidly the rand can depreciate in risk-off phases when the liquidity wave pulls back to the US, leaving the rand on the rocky shore. (Increasing bond yield differential; USDZAR increases). Our strong correlation however weakened in August 2022 when the US 10-year yield rocketed higher after the Fed started their hiking cycle. Let’s zoom in on the Fed since its Fed week. The most important chart in the market , the Fed’s balance sheet: www.federalreserve.gov . The Fed has so far tapered roughly 5.52% off its balance sheet since April 2022. The Fed is selling treasuries to taper its balance sheet and to soak up liquidity from the market (if there will be enough buyers, only time will tell). This is rand negative. Now let’s get to where all this week’s focus will be, the Fed’s interest rate decision. The Fed is expected to slow its rate hikes to 25bps this week and push rates from 4.50% to 4.75%. The Fed tends to follow the US02-year yield (US02Y) as guidance on its interest rates and it seems as if the US02-year yield has topped out between 4.75% and 5.00%. The Fed pause seems near, and the latest inflation figures from the US supports the narrative that the Fed has managed to cool inflation. The most concerning thing in the market currently is the inverted yield curve: History doesn’t repeat itself, but it rhymes. For the Fed to normalise the credit markets it will have to pause rates. That is usually when something the market breaks and the Fed is forced to cut rates and inject liquidity into the markets. When the Fed pushes easy money ( QE or whatever buzz phrase they'll use) into the market investors rotate from longer dated bonds to shorter dated bonds. To conclude, if and when the Fed pauses its rate hikes, the US10-year yield will melt higher which could be rand positive based off our correlation analysis. Just have popcorn (and gold , silver and other real assets) ready for when the Fed is forced to cut rates/ pivot because that will be caused by arguably the biggest credit market implosion in the history of fiat money. To end off I leave you with the words of Zoltan Pozsar: "commodities are collateral, and collateral is money."
by Goose96