A Silver Lining in BrazilThe USDBRL recently broke above a descending channel, signaling further BRL weakness; an unusual occurrence given the ongoing shift to easing cycles by major global central banks.
Figure 1: Major Central Banks Begun Rate Cuts; USDBRL Rises Instead
On September 18th, the Federal Reserve (Fed) cut rates by 50 basis points, marking its first reduction since the pandemic. Several other central banks, such as Bank of Canada (BOC), European Central Bank (ECB), have continued their ongoing rate cut cycle in the past few months. While uncertainties remain about the pace and extent of these cuts, there is a clear consensus among major central banks to adopt a dovish stance.
Historically, monetary decisions by major central banks, especially the U.S. Federal Reserve (Fed), have directly influenced the USDBRL exchange rate. Higher U.S. rates attract capital inflows, strengthening the USD and weakening the BRL. Consequently, one would expect USDBRL to continue trending lower in line with anticipated rate cuts. Instead, USDBRL recently surged to levels reminiscent of the pandemic era, defying conventional expectations.
Figure 2: Brazil’s Central Bank Acts Swiftly on Inflation
The Brazilian Monetary Committee (COPOM) was one of the earliest to react to rising inflation, initiating aggressive rate hikes as early as 2021. This preemptive stance set COPOM apart from other major central banks, which only began tightening in 2022. The much more aggressive hikes helped stabilize the BRL, leading to a sustained downtrend in USDBRL.
The COPOM has also been quick to address the recent reversal in inflation trends. A 25-basis-point rate hike in September and November signals the start of a monetary tightening cycle aimed at countering inflationary pressures, especially in food and energy prices.
Figure 3: COPOM Leads Global Rate Hike and Rate Cut Cycles
Although COPOM began cutting rates in the second half of 2023, global narratives remained focused on the U.S.'s potential for a soft landing. Amid the lack of confidence in post-pandemic recovery and lack of direction in major central banks’ stance on rate hikes, capital stayed in developed markets. However, the latest cuts from major central banks suggest a shift toward more accommodative policies, potentially sparking renewed interest in riskier emerging market assets. Brazil stands to benefit from this shift, particularly following COPOM’s decision to raise rates. Yet, the recent USDBRL breakout suggests a market sentiment that is incongruent with these developments.
Figure 4: Divergence Between Brazil’s Ibovespa and S&P 500 Continues
This odd occurrence extends to the equity market as well. Back in March 2024, we noted the divergence between the S&P500 and Ibovespa. While the divergence narrowed slightly after, the S&P500 benefited from the subsequent AI-driven gains, and Brazil’s Ibovespa futures lagged. This reflects a broader uncertainty surrounding Brazil’s financial outlook.
Figure 5: Brazil’s Overall Flow Remains Positive
The trade balance measures the difference between exports and imports of goods and services whereas the capital flows measure the ownership of Brazilian assets by foreigners against foreign assets owned by Brazilians. This can include foreign direct investment, portfolio investment and other investments.
Despite episodes of capital outflow in 2024, Brazil’s trade surplus has been relatively stable, which has effectively provided a buffer. Throughout the first half of 2024, the net positive combined inflow signals an overall greater demand for the BRL and ought to provide additional support for the currency.
Moreover, China’s recent stimulus measures are likely to have a positive impact on Brazil. As a major commodity exporter, Brazil’s trade figures are closely tied to China’s economic performance. The announcement of China’s 2025 investment budget for construction projects is expected to further boost Brazil’s trade numbers.
Though there is different dynamics in international trade and investment, market sentiment still weighs heavily on bearish expectations on Brazil’s financial market over her strong trade capabilities.
Figure 6: Brazil’s GDP Shows Robust Growth
Brazil’s central bank recently revised its 2024 growth forecast upwards, citing stronger-than-expected data. Brazil’s GDP grew by 1.4%, while real GDP expanded by 2.68%, rebounding after two quarters of stagnation. With annual GDP growth projected to hit 3% by the fourth quarter, Brazil’s economy is proving to be more resilient than market sentiment suggests.
Figure 7: Brazil’s Labor Market Remains Robust
While the market panicked over U.S. unemployment rate spike in July, Brazil’s unemployment rate has been consistently declining, a clear indication in a significant improvement in labor participation rate. Furthermore, wages, benchmarked using real earnings, have shown significant recovery post-pandemic, reaching new highs. This labor market strength further supports the fundamentals of the Brazilian economy.
Figure 8: Brazil’s Fiscal Concerns Weigh on Sentiment
Brazil’s rising government debt and debt-to-GDP ratio have raised concerns among investors, highlighting a significant fiscal challenge. While the debt-to-GDP ratio had improved in recent years, 2023 marked a reversal suggesting a possible upward trend that alarmed markets. This is compounded by the government’s recent decision to relax budget targets for 2025 and 2026, extending the timeline to achieve fiscal surplus. Such moves signal a longer period needed to stabilize Brazil’s growing public debt, prompting fears of higher future inflation and questions about the government’s commitment to fiscal discipline. Investors worry that these factors could lead to elevated inflation expectations and erode the perceived value of Brazilian assets, demanding higher risk premiums to compensate for fiscal uncertainty.
Every Cloud has a Silver Lining
Despite these fiscal challenges, Brazil’s economy continues to demonstrate resilience. Trade surpluses remain robust, GDP growth is positive, and the labor market is strong. COPOM’s recent rate hike signals its determination to combat inflationary pressures. Brazil’s Treasury Secretary, Rogerio Ceron, has pledged to outperform fiscal targets, while Moody’s recent credit rating upgrade in October places Brazil just one notch below investment grade. This contrast between solid economic fundamentals and fiscal instability has created a situation where the market appears overly focused on Brazil’s fiscal risks, potentially mispricing the country’s overall economic health. Consequently, this divergence highlights a lopsided risk premium that investors may exploit, particularly by engaging in relative value trades on the yield curve.
Gaining Access to the Yield Curve
Brazil’s main interest rate contract, the DI Futures which is traded on the B3 exchange, reflects the expectations of the market for the average DI Rate over a specified period – starting from the trade day (inclusive) to the contract’s maturity date (exclusive). The DI Rate is the average rate for one-day Interbank Deposit Certificates (CDI) traded between different banks but, nowadays, considering their methodology and the current market dynamic, this rate has the same value of Selic Over Rate (Brazilian interest rate benchmark that will follow the Selic Target Rate). The Selic Target Rate is the interest rate set by the COPOM and used by the Brazil Central Bank in the implementation of the monetary policy. Both local and non-local investors trade the DI Futures to express their views and expectations of the Brazilian yield curve, making DI Futures one of the most liquid interest rate instruments traded globally. Furthermore, B3’s COPOM Option Public Dashboard provides a convenient visualization of such market sentiment – Selic Target Rate probabilities decided at each COPOM meeting. These probabilities are calculated with B3’s COPOM Option contracts.
All DI Futures contracts are cash settled and payout 100,000 BRL at the end. The total profit and loss will include all the daily settlement to be carried out until the expiry date. Since the DI Futures contract is quoted in rates, to express the view of a rate cut, an investor can simply short the DI Futures in the respective maturities being studied. Furthermore, by analyzing DI Futures rates across shorter maturities, investors can gauge market sentiment regarding future COPOM actions while rates across longer maturities reflect sentiments on the broader outlook on economic conditions. An example to interpret the DI Futures rates and calculate the daily settlement is provided by B3 under the topic of directional positions.
Figure 9: Setting up the Trade
Evidently in Figure 2, the COPOM has always reacted promptly to address any reversals in inflation trend. As it is incredibly difficult to predict future inflation trends and other economic conditions, it is therefore difficult to predict COPOM’s reaction in the future. As such a directional trade on DI Futures can prove to be relatively risky.
As of 10th Nov 2024, the rates quoted by the DI1F35, expressing a 10-year view, and the DI1F27, expressing a 2-year view, are at 12.49% and 13.09% respectively, resulting in an inverted yield curve.
Considering Brazil’s strong economic fundamentals, the current inverted yield curve appears overly pessimistic. A trade, constructed with DI1F27 and DI1F35, that anticipates a normalization to a positive yield curve could be profitable. To set up the trade, we would have to calculate the sizing ratio from a Basis Point Value (BPV) neutral perspective. The computation is shown in the table below.
We would consider taking a long position on the forward rate strategy by selling 100 DI1F27 futures and buying 55 DI1F35 futures. Each basis point move in the DI1F27 leg is 100 * R$ 14,46 = R$ 1.445 and each basis point move in the DI1F35 leg is 55 * R$ 27,35 = R$ 1.504. Evidently, each basis point move in the DI rate would have roughly the same profit and loss impact on either contract. This is achieved by the BPV neutral calculation.
From Figure 9, we would place the stop-loss at -0,65, a historical support line, for a hypothetical maximum loss of 5 basis points, 5 * R$ 1.504 = R$ 7.520. Likewise, we would place the take-profit at 0,93, a historical resistance line, for a hypothetical gain of 153 basis points, 153 * R$ 1.446 = R$ 221.238.
In conclusion, this relative value trade would be more favorable. As expressed in this trade, the normalization could happen as a result from either a rise in the DI1F35, a fall in the DI1F27, or a concurrent rise and fall in the DI1F35 and DI1F27 respectively. This proves that a relative value trade is likely to be less risky as compared to a directional bet on the Selic Target Rate using one DI Futures contract.
Fixedincome
KraneShares Asia High Yield Bond ETF Analysis 10/15/24DISCLOSURE: As of 10/15/24 I have no open position in NYSE: KHYB
KHYB is an asia focused high yield corporate bond fund. The current yield is 15.3% per annum.
Why asia high yield?
1. Higher risk premium for high yield corporate bonds
The asia corporate bond sector has higher yield given similar rated bonds in western markets. In particular the spread for high yield asian corporate bonds is 800 basis points above the risk free rate.
2. Lower default rates and higher coverage ratios
Asia high yield bonds have lower default rates and higher coverage ratios to their US and EU counterparts. This fact alongside the higher risk premium points to a greater reward/risk ratio in the bond market compared to other regions and grade of bonds.
3. Capital appreciation potential
With the defaults of the Chinese real estate developers the asia high yield space took a hit in price and default rates. If you are confident that default rates will return to the historic norm or lower the share price of KHYB could return to the previous highs in the $40/share range.
Why KHYB?
1. Excludes Japanese bonds
Japan is an exception in the asia bond space in that the country has negative real yields. Not to say they should be avoided, but if you are looking for positive yields and not to speculate on rates removing Japan is a prudent choice.
2. Shorter bond duration
KHYB has an average bond duration of 2 years. This is below the asia high yield average of 2.7 year duration. This lowers the price fluctuations as opposed to longer dated bond funds.
3. Below average default rates
Despite the defaults in broader asia credit market throughout 2022, the KraneShares fund did not experience a single default in their portfolio. Of course their portfolio declined in value alongside the market, but this statistic goes to show the responsibility and competence of the managers.
Here is the link to a presentation by KraneShares where I sourced most of this data: engage.kraneshares.com
If you enjoyed my article follow for more reports posted regularly
TLT ~ Have US Yields finally topped? (Weekly / Nov 2023)NASDAQ:TLT chart mapping/analysis.
Note: TradingView chart dividend adjusted.
Price action bouncing off Golden Pocket (66% Fib) support
Heavy trading volume = institutional activity (ie positioning?)
Rejection wicks on previous weekly candles = selling pressure still present (correlation with long-end yields holding strength)
Looking for re-test of lows + bounce to confirm double bottom support base established for bullish momentum.
Inverse play = price action engulfs previous candle, completes gap partial-fill + taps overhead resistance aka descending trend-line (light blue dotted).
Institutional short-squeezes could still be active - complimenting inverse play thesis.
Failure to break above/below either trend-lines = price action continues to contract until eventually ripping in volatile fashion in either direction.
Set alerts - monitor US yields - wait for trade to set up in your favour.
Harvesting Risk Hedged Treasury YieldEver heard of risk-free rates? Risk free rates are commonly understood to refer to interest rates on 10-year US treasuries. These are considered risk-free as the likelihood of the US government defaulting is considered extremely unlikely.
Treasuries pay out a fixed interest and can be redeemed for their face value at maturity. Fixed returns and negligible default risk make treasuries a critical addition to any decent investment portfolio.
With inflation on the downtrend and Fed’s hiking cycle nearing its apex, long term treasuries provide a fixed income-generating asset with no reinvestment risk.
Little default risk does not mean zero market risk. As highlighted in our previous paper , bond prices are materially exposed to interest rate risk. CME Group’s treasury futures allow investors to hedge that risk.
This paper has been split into two parts – the first provides an overview of treasury futures and their nuances while the second walks through the trade setup required to harness risk-hedged yield.
TREASURY FUTURES
Treasury futures enable investors to express views on a bond’s future price movement. Investors can also hedge against interest rate risk by locking in a coupon rate. CME treasury futures are deliverable with eligible treasury securities which ensures price integrity.
QUOTING
Treasuries are quoted in fractional notation as a percent of their par value. For instance, a bond quoted at 111’272 suggests that it is trading 11 + 27.2/32 (11.85%) above its par value. This allows standardized quotation of bonds with different coupon rates.
Note that notion of quotes in cash markets may be different from futures.
AUCTION SCHEDULE
Treasuries are auctioned periodically depending on their maturity duration.
• Treasury Bills with maturity between 4 to 26 weeks are auctioned every week while T-Bills with maturity of 1-year are auctioned every four weeks.
• Treasury Notes with maturity of 2, 3, 5, and 7 years are auctioned every month while T-Notes with maturity of 10-years are auctioned every quarter.
• Treasury Bonds are auctioned every quarter.
The auctions for each type of security are staggered to reduce their market impact.
CONVERSION FACTOR
It is possible for a large range of “eligible” treasuries to be available for deliveries against standardised futures contract as new treasuries are regularly auctioned at changing rates. The most recently auctioned securities that are eligible for delivery are called “on the run” securities.
To standardize the delivery process for varying securities, a conversion factor unique to each bond is used. The buyer of the futures contract would pay the Principal Invoice Price to the seller. The Principal Invoice Price is the “Clean Price” of the security and is calculated by applying the Conversion Factor to the settlement price.
When the Conversion Factor is less than 1, the buyer pays less than the settlement price and when it is higher than 1 the buyer pays more.
ACCRUED INTEREST
In addition to the adjustment for the quality of the bond being delivered, the buyer must also compensate the seller for any interest the bond would accrue between the last payment and the settlement date.
The final cost to deliver the treasury futures contract would be the Clean Price + Accrued Interest.
CHEAPEST TO DELIVER
Due to the Conversion Factor, which is unique to each bond, some bonds appear to stand out as cheaper alternative for the seller to deliver. So, if a seller has multiple treasury securities, a rational seller will choose to deliver the one that best optimizes the Principal Invoice Price.
As a result, futures price most closely tracks the Cheapest-to-Deliver ("CTD”) securities.
This also provides an arbitrage opportunity for basis traders. In this case, the basis is the relationship between the cash price of the security and its clean price on the futures market. Small discrepancies in these may be profited upon.
Notably, specialized contracts such as CME Ultra 10-year Treasury Note futures with selective eligibility requirements diminish the effects of CTD by reducing the range of deliverable treasuries.
HEDGING BOND PRICE RISK WITH TREASURY FUTURES
Treasury securities are a crucial and substantial addition to any well diversified portfolio, offering income generation, diversification, and safety.
With interest rates elevated and inflation heading lower, coupon rates for long-term US treasuries are yielding positive real returns. Moreover, 10Y yield is hovering at its highest level in 13-years suggesting a strong entry point.
Since the coupon rate of the security is fixed and they can be redeemed at face value upon maturity, the present higher yielding treasuries are a great long-term income generating investment.
Despite the inverted yield curve, which suggests yields on longer-term securities are lower, a position in long-term bonds protects against reinvestment risk. Reinvestment risk refers to the risk that when the bond matures, rates may be lower.
With Fed at the apex of its hiking cycle, rates will likely not go any higher. So, a position in long term T-bond, locked in at the current decade-high rates, offers a lucrative opportunity. The position also benefits in the uncertain scenario of a recession as bond prices rise during recessions.
This investment fundamentally represents a long treasury bond position which profits in two ways: (a) Rising bond prices when interest rates decline, and (b) Coupon payments.
If the coupon payout is unimportant, fluctuations in the bond price can be profited upon in a margin efficient manner using CME futures. This does not require owning treasuries as the majority of the treasury futures are cash settled with just 5% reaching delivery.
In the fixed income case, the bond is held until maturity which leads to opportunity costs from bond price fluctuations.
CME futures can be used to harvest a fixed yield from treasuries and remain agnostic to rate changes, by hedging the long treasury position with a short treasury futures position.
This position is directionally neutral as losses on one of the legs are offset by profits on the other. The payoff can be improved by entering the short leg after bond prices are higher.
To hedge treasury exposure using CME futures the Basis Point Value (BPV) needs to be calculated. BPV, also known as DV01, measures the dollar value of a one basis point (0.01%) change in bond yield. BPV depends upon the bond’s yield to maturity, coupon rate, credit rating and face value.
Notably, BPV for longer maturity bonds is higher as their future cashflows are affected more by changes in yield.
Another commonly used term is modified duration which determines the changes in a bond’s duration or price basis of a 1% change in yield. Importantly, the modified duration of the bond is lower than 100 BPV’s since the bond price relationship to yield is non-linear.
BPV can be calculated by averaging the absolute change in the bond’s yield-to-maturity, its value when held until maturity, from a 0.01% increase and decrease in yield. Where there are multiple bonds in a portfolio, the BPV for a unit exposure will have to be multiplied by the number of units.
On the futures side, BPV can be calculated as the BPV of the cheapest to deliver security for that contract divided by its conversion factor.
By matching the BPV’s on both legs, the hedge ratio can be calculated. This represents the number of contracts needed to entirely hedge the cash position.
SUMMARY OVERVIEW OF CME TREASURY FUTURES
CME suite of treasury futures allow investors to gain exposure to treasury securities across a range of expiries in a deeply liquid market.
Each futures contract provides exposure to face value of USD 100,000.
The 2-Year, 5-Year, and 10-Year contract are particularly liquid.
Micro Treasury Futures are more intuitive as they are quoted in yields and are cash settled. Each basis point change in yield represents a USD 10 change in notional value.
These products reference yields of on-the-run treasuries and settled daily to BrokerTec US Treasury benchmarks ensuring price integrity and consistency.
Micro Treasury Futures are available for 2Y, 5Y, 10Y, and 30Y maturities enabling traders to take positions across the yield curve with low margin requirements.
TRADE SETUP TO HARVEST RISK HEDGED TREASURY YIELDS
A long position in the on-the-run 10Y treasury notes and a short position in CME Ultra 10Y futures allows investors to benefit from the treasury bond’s high coupon payment while remaining hedged against interest rate risk.
Hedge ratios can be calculated using analytical information from CME’s Treasury Analytics Tool to obtain the BPV of each of the legs:
The on-the-run treasury pays a coupon rate of 3.375% pa. and its last quoted cash price was USD 98.04. It has a DV01 of USD 76.8.
Since, each contract of CME Treasury Futures represents face value of USD 100,000, the long-treasury position would need to be in multiples of USD 100,000.
For a face value of USD 500,000 (USD 100,000 x 5) this represents a notional value of USD 490,000 (Face Value x Cash Price) .
The long-treasury position's DV01 = USD 76.8 x 5 = USD 385.
The cheapest-to-deliver security has a DV01 of USD 92.2 and a conversion factor of 0.8244.
The futures leg thus has a BPV = Cash DV01/Conversion Factor = USD 92.2/0.8244 = USD 111.8.
The hedge ratio = BPV of Long Treasury/BPV of Short Futures = USD 385/USD 111 = ~4 (3.4)
So, four (4) lots of futures would be required to hedge the cash position which would require a margin of USD 2,800 x 4 = USD 11,200.
Though the notional on the two legs does not match, the position is hedged against interest rate risk and pays out 3.375% per annum in coupon payments.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Long bond TLT looking more and more constructive in this rangeThe TLT has been mostly chopping sideways for the last 4 months, and while it is still directionless, it has been able to stay above it's cycle lows and not roll over to retest them.
This consolidation is looking more and more healthy and if we can finally get some closes above 109, this could finally initiate a second leg higher to those Q2 2022 levels. Started a position here and would add on strength on continuation.
US 10Y yield is eroding a major band of supportIt's pretty much all about Fibonacci today - the market has recent peaked at around 4.24 and is in the process of eroding a key convergence of support at 3.25/3.32 (lows since January, the 55-week ma and the 2018 high). These are looking vulnerable and failure will imply a deeper corrective move lower towards 3.00 and potentially 2.80ish - the 38.2% retracement of the entire rally from the 2020 low.
Remember todays close will also constitute a weekly close on the charts so this should be watched closely.
#Bund market is completing a falling wedge #reversal patternJust wanted to highlight the falling wedge pattern on the bund (#reversal) that we noted on Friday will complete on a close above 137.25, however given the move this morning we will just go with it. It offers an approximate 147 upside measured target.
Near term #resistance is 140.63/85 - the 23.6% retracement of the move down from December 2021, the June 2022 low and the January 2023 high.
#markets #trading #investing #technicalanalysis
Disclaimer:
The information posted on Trading View is for informative purposes and is not intended to constitute advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. The information therefore has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Opinions expressed are our current opinions as of the date appearing on Trading View only. All illustrations, forecasts or hypothetical data are for illustrative purposes only. The Society of Technical Analysts Ltd does not make representation that the information provided is appropriate for use in all jurisdictions or by all Investors or other potential Investors. Parties are therefore responsible for compliance with applicable local laws and regulations. The Society of Technical Analysts will not be held liable for any loss or damage resulting directly or indirectly from the use of any information on this site.
Pay attention to the downtrend on the #BundA significant loss of downside momentum depicted by the #divergence of the weekly and month #RSI AND a potential falling wedge suggests that market should be closely monitored for signs of #reversal.
#fixedincome #technicalanalysis #trading #investing
Disclaimer:
The information posted on Trading View is for informative purposes and is not intended to constitute advice in any form, including but not limited to investment, accounting, tax, legal or regulatory advice. The information therefore has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. Opinions expressed are our current opinions as of the date appearing on Trading View only. All illustrations, forecasts or hypothetical data are for illustrative purposes only. The Society of Technical Analysts Ltd does not make representation that the information provided is appropriate for use in all jurisdictions or by all Investors or other potential Investors. Parties are therefore responsible for compliance with applicable local laws and regulations. The Society of Technical Analysts will not be held liable for any loss or damage resulting directly or indirectly from the use of any information on this site.
Fixed and Basic Income During Recessionary TimesThe talk of economists these days seem to be "Cash is King" (esp USD) vs "Cash is Trash". While it's true that a lot of people are liquidating their assets now in favor of dollars, given that our economies are interconnected more now than ever before, this might only last for a very short period of time.
While the market is likely to go into panic mode soon (the top-earners are finally getting a *tiny* taste of what people below them have been going through for years) it might help to take a step back and look at the bigger picture since most of the problems with the economy right now are existential, not technical.
Sort of a throwback to my #YangGang days with Andrew Yang, but UBI would have been pretty nice to have right about now. Yes, UBI does help alleviate poverty, but it also helps stabilize economies and labor markets during difficult transitions as well - that's what it was designed to do originally, and it is a brilliant idea that is literally good for *everyone*.
As stock/asset prices start to plummet, everyone is talking about moving their money to "fixed-income" sources now, to help stop the "bleeding". One of the silver linings of the recession is that there seems to be higher demand for labor, which could potentially increase wages and stabilize the economy that way - but people do need time to adjust and learn new skills to find new work. UBI does both in a simple and elegant way.
One of the big criticisms of UBI was that it would cause inflation since it would bring up the costs of everything. It's ironic to see how inflation became the talk of the town now despite the opposition coming from both sides of the political spectrum. Purchasing power is relative - the way to look at UBI from a budgeting standpoint is that you're dedicating a % of your total funds toward stabilizing the economy, which - again - should be good for everyone.
Hindsight is 20/20 and unfortunately we're now forced to work with what we did (and didn't) do thus far. Many economists - including major ones - have been eyeing cryptocurrencies as a potential "safe haven" during the market crash that's likely to continue well into 2023-24. How likely is it for people to turn to crypto during trying times?
Staking rewards are currently outperforming bank interest rates and may become more appealing over time, while crypto projects based around the concept of UBI may start to gain favor as the top-earners realize that these models are in their own interest, too. (It's a big *if*, but UBI-tokens might be the thing that ETH needs to revive its lackluster performance post-merge, imho.) Most investors are running towards cash for safety now but if that fails too, there will be no options left. That's when crypto may finally see its day - time will tell.
www.theguardian.com
A Simple High Probability Swing Trade Set Up for UK Gilt FuturesSince the January of 2021, UK Gilt futures has been trending down sharply. One of the main reason why I always enjoy trading bond market is that its trend is very clear and also persistant. The price often follows a textbook style of breakouts and retracements, occurring at clear support and resistance levels. Recently, the price has made a new low and aims to test the next support area of 115~116. This indicates that the down trend is still very valid and we are only looking to enter sell positions. The price is currently at the impulse stage, which means that there is no immediate action for us to take now. We are looking to sell the pull backs from the previous support level of 120 area. We expect the price to retrace back with a bearish flag pattern. Once the sell limit orders are hit, our first target is the next support level of 115, and our second target is the 112 area. This is a good passive trading set up where you can combine with your intraday trading to diversify your portfolio.
We will update this post after the price comes near the entry zone.
Correction in Russian local sovs not yet implemented in corpsAs usual, Russian local corp bonds are less sensitive to momentum than sovs (OFZ). On price charts you can see that in spite of correction in OFZ corp index moved less. Investors should be more careful in local corps selection paying more attention to spread values.
Credit SpreadsWhen economy faces drag lending and borrowing of USD tightens. Investors expect higher yield for taking more risk causing the spread to widen, and liquidity to increase this also shows expectations of future default risk. High yield spreads- option adjusted have bottomed and are now starting to slowly trend upwards. This is showing the market is not really worried about credit risk. This is something to watch moving forward, and might play out for a nice set up.
BB - BBB spread offers opportunitiesIn a world where everything seems expensive the BB bond still seems Attractive in comparison to BBB rates corporate debt. The BB continues to offer a nice spread 143 BP spread over its BBB relative.
Now with that in mind one must remember recently for the first time ever HY (high yield) corporate debt now yields below the rate of inflation, however with the FED backstopping the risk associated with HY by buying up junk bonds it definitely deserves a look.
The BB offers a possible opportunity similar to short term yield, but the risk would be classified as closer to investment-grade. As BB is obviously the highest level of HY debt out there.
The leverage ratios of BBs are closely related to BBBs. Default rates for BBs also have only been about 50BP higher than that of BBBs.
BBs also have a low risk premium in comparison to the rest of the HY corporate debt sector. It is definitely something to look into further.
ZenMode Snapshot: Bitcoin Fundamental/Technical AnalysisStill think the fundamentals for bitcoin are incredibly bullish:
Miners:
Outflows - Bearish
Miners still depositing to exchanges - Bearish
BTC Whales:
Reserves Increasing - Bullish
Transferring BTC off exchanges - Bullish
Institutions:
Still a narrative of corporations acquiring BTC in leu of traditional treasury assets - like treasuries
Bombarded with treasury yields now indicating inflation is coming
$1.9 T Stimulus
I have gotten questions about why the sell off in commodities, crypto, treasuries and equities last week - and aside from technical reasons, the article sourced below from Bloomberg is a must read:
"Already low short-term interest rates are set to sink further, potentially below zero, after the Treasury announced plans earlier this month to reduce the stockpile of cash it amassed at the Fed over the last year to fight the pandemic and the deep recession it caused. The move, which aims to return its cash position at the central bank to more normal levels, will flood the financial system with liquidity and complicate Powell’s effort to keep a tight grip over money market rates.”
" ... a drop in short-term market rates into negative territory could prove disruptive, especially for money market funds that invest in short-dated Treasury securities. Banks may also find themselves hamstrung by effectively being forced to hold large unwanted cash balances at the central bank. The Treasury’s decision -- unveiled at its quarterly refunding announcement -- will help unleash what Credit Suisse Group AG analyst Zoltan Pozsar calls a “tsunami” of reserves into the financial system and on to the Fed’s balance sheet. Combined with the Fed’s asset purchases, that could swell reserves to about $5 trillion by the end of June, from an already lofty $3.3 trillion now."
"Here’s how it works: Treasury sends out checks drawn on its general account at the Fed, which operates like the government’s checking account. When recipients deposit the funds with their bank, the bank presents the check to the Fed, which debits the Treasury’s account and credits the bank’s Fed account, otherwise known as their reserve balance."
So think about this from the perspective of a financial institution, they would have to make the Treasury market holding a product with potentially negative yield - while also forced to buy insurance on the larger reserves they will need to manage. If you are a financial institution are you going to want to offer financing in the overnight market that has negative yield so a company you work with can hold Treasuries? And with the flood of Treasuries & Liquidity this also has muscled up the 5Y yield while the repo market might potentially be going negative. With the 5Y yield up now in Treasuries I am reading how the 10Y yield is comparable now to the SPY Dividend of 1.45% - and keep in mind the reduced risks in holding Treasuries. They are practically as good as gold for a corpo.
10Y Yield
10Y Bond
5Y Yield
5Y Bond
So while the Federal Reserve controls the Federal Funds Rate, the Treasury Department can absolutely impact the yield in treasuries, and impact the overnight rate.
This hurt risk assets, as the market now needs to price in Treasuries actually offering yields potentially worth getting into. A fascinating exchange exchange with MicroStrategy CEO Saylor talking to Bloomberg discusses thought that even now this yield is a pittance when compared to the cost of capital for companies. It is telling that a company with modest cash flow is saying that rather that investing into their operations further, and rather than giving back to shareholders, or doing share buy backs they are purchasing bitcoin as the yield on bitcoin is stunning relative to Treasuries or holding a basket of FANG stocks.
Really interesting interview worth watching:
www.youtube.com
The key is if other executives will follow the lead of TSLA, SQ, MSTR and add Bitcoin on the balance sheet. While it may seem unconventional, keep in mind if you are a multinational corporation it is perfectly normal to have hundreds of bank accounts, like Disney, Microsoft or Facebook for example because you have vendors all over the world you will need to compensate for their services, in their currencies.
Technical Snapshots:
If price continues to sell off nice confluence of support with pivot points/fibonacci fan & bollingers at $40k - $40k breaks, we could hit $38k rather rapidly before I imagine buyers will be attracted
Bulls will have a tough time breaking $48.5k followed by $50k . Even then, we might form a lower higher, and test support yet another time before continuing to new ATH
I remain long, and am nibbling on dips, and enjoying these rips. I plan on adding to the position if we break $40k. My exit strategy will be to bail If we fall under $28k, as at that point I would have 3X'd the initial cost basis of this position.
In closing, do not forget, why is the Repo market going negative, and why are 5Y yields rising? Inflation concerns. The formula for inflation is M2*V= inflation. Velocity will increase as the nation opens back up causing inflation, especially as the M2 supply is about to take on another jolt. I suspect this stimulus will pass, and I think Bitcoin is a potential lifeboat when inflation hits. Yes, we need to price in treasuries now - and yes I thought it was bonkers that the market suddenly tanks treasuries to pop yield for inflation and then - the market rotates into the dollar? So inflation is coming and the dollar rises as it did on Friday? I think I would recommend parking some wealth in the bitcoin lifeboat. Perhaps a moonshot, but this macro-narrative warrants it in my opinion.
Final Quote coming from Michael Burry last week:
"The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket." #ParadigmShift
— Cassandra (@michaeljburry) February 20, 2021
Good luck traders! If you enjoy please be sure to hit the like button, and tell me what you think! Hope you all make a million! :)
Keep in mind when the gold-bitcoin bears come out saying that it is too volatile, it is worth advising that even with this sell off you can still acquire an ounce of gold for only 0.038 BTC:
Or 745 barrels of oil:
Source:
www.bloomberg.com
Monitor Bond Yields - Feels like 1987?Hey there, thanks for reading my idea! This isn't financial advice. Remember to do your own DD. Investing is risky.
This is connected to my "Feeling Overextended?" idea which can be found here .
An important metric to watch when determining whether a recession is imminent is the inversion of the Treasury bonds yield curve. Most specifically, the 3-month, 2-year and 10-year yields. The inversion occurs when the shorter-term note yields begin to rise and exceed long-term note yields.
Ideal bull market conditions would have higher yields in long-term notes and lower yields in short-term notes. Higher long-term yields forecast economic growth where the Government can be expected to be able to pay back the bond. Typically, higher yields are associated with higher interest rates, which poses as an investor risk, hence the higher yield premium. Meanwhile, higher short-term yields forecast economic downturn as investors look for shorter time horizon returns to minimize risk.
We have to remember that the Fed is expanding it's balance sheet through QE by buying certain assets such as mortgage-backed securities and TREASURY NOTES from the market, and J. Powell is confidently using his tools to prevent a market crash. By buying Treasury notes, the Fed can manipulate yields to create a positive outlook of the economy through a "positive" yield curve, rather than an inverted yield curve. In fact, the Fed has accumulated approximately $3billion in Treasury notes since the Covid crash. (source here , scroll down to the Fed Balance Sheet graph.)
Is it recession time yet according to the yields? Maybe not yet, but once the 3 month and 2 year yields begin to rise, this should place pressure on the 10 year yield to fall., setting the stage for the next downward cycle.