Predictive Correlation the SG10Y Bond Yields on S&P500I have posted about this correlation previously. Perhaps this time it might be clearer to see...
This uncanny correlation between the SG10Y Govt Bond Yields as a leading indicator for the S&P500 was noticed some time ago, and tested since.
As shown, the major turning points were seen in trend changes of the SG10Y GBonds first, before the S&P500 reacted. The vertical time markings show when you would short or long depending on the trend breakouts of the SG10Y GBonds (see lower panel, blue line),
Comcomitantly, comparing what happens from that point, you can see the S&P500 in the upper panel with yellow line.
The lowest panel is the MACD... and this shows the correlated pattern of a (lagging) technical indicator.
Since 2023, there are at least six instances with 100% hit rate.
Now... that brings us to TODAY.
It appears that we are given advance warning of the next couple of months.
For now, there should be a quick pop up to the very recent high followed by a failure of support in the S&P500; and then the expected trends should play out...
Governmentbondyields
Storms are Brewing: Is your Portfolio Weatherproof? Risk strikes when least expected. Optimism peaks before a downturn strikes. Chart below shows remarkable spike in articles mentioning soft-landing before recession hits. Human brain is engineered to think linearly.
Anything non-linear tricks the mind. Recession is non-linear which muddles up investor estimates of recession, its timing and impact.
Count of Soft-landing Articles & US Recession (Source: Bloomberg )
The US Federal Reserve in its fight against inflation has lifted rates by an unprecedented 525 basis points since the start of 2022.
Yet the American economy, US corporations, and the US consumer are remarkably resilient. Non-Farm Payrolls last week came strong. When the Fed is tightening its levers to slow the economy, nothing seems to stop its rise. What explains this anomaly?
Three words. Monetary Policy Transmission.
Monetary policy transmission takes time, lulling many to believe that consumers and corporates are resilient. When in fact, they are yet to face the consequence of constrained credit markets which will manifest itself in myriad ways from reduced availability of financing, high cost of funding, and rising bankruptcies, just to name a few.
This paper is set in two parts. First part describes monetary policy transmission. Part two dives into storms forming in the horizon. The paper concludes with a hypothetical trade set-up using CME Micro S&P 500 Options to defend portfolios from deepening polycrisis.
Despite the risk narratives, a soft landing may still be possible. However, the combined impact of Fed’s hawkish stance, rising geopolitical tensions, continuing auto workers strike, tightening of financial conditions, and elevated oil prices & yields renders the likelihood of a soft landing, super slim.
Narratives around the soft-landing aside, CTAs have dumped nearly USD 40 billion worth of S&P 500 futures positions marking the fastest unwind on record over the last two weeks as reported by Goldman Sachs.
PART 1: MONETARY POLICY TRANSMISSION
Monetary policy operates with long and unpredictable lags. Monetary Policy Transmission is the process through which a Central Bank’s decisions impact the economy and the price levels. The flow chart below schematically describes the downstream impact of quantitative tightening.
Monetary Policy Transmission Takes Time (Source: ECB )
Changes made to official interest rates affect markets in diverse ways and at distinct stages. Central bank's interest rate decisions impact the markets in the following seven ways:
1. Banks and Money Markets: Rate changes directly affect money-market rates and, indirectly, lending and deposit rates.
2. Expectations: Expectations of future rate changes influence medium and long-term interest rates. Monetary policy guides expectations of future inflation.
3. Asset Prices: Financing conditions and market expectations triggered by monetary policy cause adjustments in asset prices and the FX rates.
4. Savings & investment decisions : Rate changes affect saving and investment decisions of households and firms.
5. Credit Supply: Higher rates increase the risk of borrower default. Banks scale back on lending to households and firms. This may also reduce consumption and investment.
6. Aggregate demand & prices: Changes in consumption and investment will change the level of domestic demand for goods and services relative to domestic supply.
7. Supply of bank loans: Changes in policy rates affect banks’ marginal cost for obtaining external finance differently, depending on the level of a bank’s own resources/capital.
The mechanism is characterized by long, variable, and indefinite time lags. As a result, it is difficult to predict the precise timing of monetary policy actions on economy and inflation.
For some sectors, monetary policy transmission can take as long as 18 to 24 months. In other words, the full force of the Fed’s 525 basis points spike since 2022 will not be felt until early 2024. Added to that, the Fed may not be done hiking yet.
Probabilities of Rate Anticipation in Prospective Fed Meetings (Source: CME FedWatch Tool )
PART 2: STORMS ARE FORMING
Not one but three major storms are brewing in parallel, namely (1) Worsening Geo-politics, (2) US Sovereign Risk Fears, and (3) Tightening Financial Conditions. One or more of them could unleash havoc, sending financial markets into a tailspin.
1. WORSENING GEO-POLITICS
Adding to the geopolitical conflict between Russia and Ukraine, Hamas attack on Israel over the weekend has elevated geo-political tensions. If counter strikes escalate to a wider region impacting Strait of Hormuz, then oil prices could spiral up sharply, sending shocks across financial markets.
Oil prices lost steam last week. That doesn’t guarantee lower prices. Eerily, this month marks 50-year anniversary of oil emergency in 1973 which led to oil prices spiking 3x back then.
The US Strategic Petroleum Reserves are at a 40-year low. The reserves are at 17-days of consumption compared to an average of 34-days consumption observed over the last thirty years.
2. US SOVEREIGN RISK FEARS: The US government is facing multiple challenges of its own. The government narrowly avoided a shutdown and has kicked the problem can down the road only by six weeks. Long before investors take relief, the shutdown fear will resurface again.
Add to that is the rising US debt levels. With a debt burden of USD 33 trillion, the government debt is forecasted to reach USD 52 trillion by 2033.
With rates remaining elevated, a substantial chunk of US Government debt will be directed towards interest payments. Is there a risk of US debt default?
To compensate for that risk, bond yields are climbing. The 10-Year treasury yields rose to 16-year high of 4.6%. With jobs market remaining solid, the data-driven Fed might have to keep the rates higher for longer.
The futures market implies a probability of 42% for a rate hike during the Fed’s December meeting. Any further hikes can tip the recovering housing market back into crisis due to exorbitant mortgage rates. High yields also cost it dearly for firms to borrow.
3. TIGHTENING FINANCIAL CONDITIONS: Dwindling liquid assets, resumption of student loan repayments, stringent lending practices atop heavy debt burden on US Corporates are collectively weighing down on investor sentiments.
Student Loan Repayments: After 3.5 years of loan servicing holidays, millions of students will resume student loan repayments. Bloomberg estimates that these repayments can shave 0.2% to 0.3% off US GDP.
Depleted Savings: Strength of the US Consumers will be put to stress tests. Extra savings from pandemic stimulus checks have been depleted to below pre-pandemic levels for low-income categories. Consumer strength could turn into weakness in the coming weeks.
Inflation Adjusted Liquid Asset Holdings by Income Group (Source: US Fed and Bloomberg Calculations )
Stringent Lending Standards: The Fed’s Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices points to 50% of the banks imposing stringent criteria for commercial & industrial loans. Lending conditions are at levels last seen during 2008 global financial crisis. Impact of this will be felt in Q4 when business will be stifled from access to funds.
Tightening Standards of Commercial & Industrial Loans (Source: July 2023 SLOOS Survey )
Corporate Debt Burden: Years of extremely low cost of funding have tempted US corporates into a debt binge. With rates rising, the debt burden is getting heavier on corporate balance sheets, cash flows, and profitability as reported by Bloomberg. Leverage ratios are rising. Interest coverage ratios are falling. Average Free Cash Flow to Debt ratios are plunging.
Debt burden amid rising rate environment is hurting US Blue Chips (Source: Bloomberg Intelligence )
HYPOTHETICAL TRADE SETUP
Against the backdrop of these risks, this paper posits a hypothetical back spread with puts to gain from sharp index moves. Unlike a long straddle, this option strategy delivers (a) outsized gains when markets plunge, and (b) limited downside risk if market remains flat or rises despite the risks.
This strategy involves selling one unit of at-the-money puts to finance purchase of two units of out-of-the-money puts. This strategy can be executed either for net positive premium or net negative premium depending on the choice of strikes.
Specifically, the hypothetical trade illustration is built around CME Micro Monthly S&P 500 Options expiring on 29th December 2023 (EXZ3). The strategy involves (a) selling 1 lot of EXZ3 at a strike of 4400 collecting a premium of USD 655 (131.16 index points x 1 lot x USD 5/index point), and (b) buying 2 lots of EXZ3 at a strike of 4300 paying a premium of USD 950 (95.041 index points x 2 lots x USD 5/index point).
The hypothetical trade involves a net debit of USD 295 (58.922 index points * USD 5/index point). This trade breaks even when S&P 500 (a) falls below 4141, or (b) rises above 4400.
Pay-off from Back Spread with Puts Trade Strategy (Source: CME QuikStrike )
Summary pay-off from this trading strategy is illustrated in the table below.
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
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SG10Y Govt Bond and SPY relationship Part IIITime for yet another update in this uncanny inverse relationship between the SG10Y Government Bonds and the S&P500 Index ETF, SPY...
Recall that the SG10Y GBond yields are in apparent inverse correlation to the SPY. When there is a trendline breakdown on the yields, the SPY is bullish; and when there is a trendline breakout, the SPY is bearish.
So far, it can be observed that this relationship is intact and predictable, with the SPY forging bullishly when the SG10Y GBond yields are falling...
Note that a support is approaching and this can mean either or both of two things:
1. There should be a brief stall in momentum incoming soon; and
2. The primary trend for the SG10Y GB Yields is bearish, expected to break the support and head further down until the end of April 2023. This also suggests that April should see a surge in the SPY (and S&P500), denoted by the larger green arrow.
So far, now change in the yield downtrend, at least for the next week, until it reaches the expected downside target (red circle).
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)
30Y US Bonds signal a correction for SPXAs you can see for the past 9 years 30 year US government bonds was in positive correlation with S&P. The correlation is not 1:1 but about 80% of the times they move together. Two incidents where they were separated was March 2020 Covid event and the subsequent bull run. Even during most of the massive bull run they moved together but a drop in 30 year yields translated as smaller corrections for SPX.
30 year yields have always been moving in a range and currently we have reached the top of that range. Based on the previous cycles we can expect 30Y yields to start traveling down towards the bottom of the range while dragging SPX down with it.
As we are in a different situation now than 2021 where there was an abundance of liquidity I expect this next cycle of bottoming impacting SPX more than those bullish times.
I don't mean that this will be a cataclysmic event that will crash and burn the markets but it will the beginning of a volatile sideways move in markets. And per my previous idea I expect SPX to come down around 3650 or lower during this phase.
The economical factors that will be deciding the size of these corrections will be FED's determination in QT and individual company performances.
US10Y Approaching the 1D MA50.The U.S. Government Bonds 10YR Yield (US10Y) is on a 3 day rebound following a hit on the 1D MA200 (orange trend-line). The 1D MA50 (blue trend-line) is the natural Resistance, but if crossed, we can expect a long-term peak at the top (Lower Highs trend-line) of the Channel Down pattern that started on the October 21 High.
A closing below the 1D MA200 first, would largely be a long-term sell signal that could break below the bottom (Lower Lows trend-line) of the Channel and target the 2.510% Support (August 02 Low) and make contact with the 1W MA100 (red trend-line), which has been our long-term bearish target since October.
The 1D RSI can also offer sell entries on its own Lower Highs trend-line.
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Short to C wave, but im a buyer of the DipsI'm both a bull and a bear on the 20yr treasury etf (TLT).. I created a long term buy analysis basis on the bullish cypher pattern I see forming at the conclusion of D leg. I like the yield of the 20yr treasury bond which is over 4%.. The dividend yield on the 20yr Treasury etf is 2.49% currently, and I expect it to rise. The dividend is paid monthly. I see the yield rising as the price of TLT declines . I see the dividend yield potentially rising to 4% , that would be an outstanding monthly yield for long term holders. You can also sell puts here, or calls to generate revenue. Long term buyer, and Call writer (which will lower my cost basis, and return use the upfront premium to buy more shares of this etf, further increasing the yield and dividends)
ID05Y: Possibility of Yield goes to 7.64%,Threat of Rate Hike?Hello Fellow Bond Investor/Trader/Global Economist, Here's our technical outlook for Indonesia 5 Year Government Bond Yield!
Chart Perspective
ID05Y is forming the symmetrical triangle and we will wait for the breakout as a confirmation of bullish bias ahead. The momentum Indicator made a golden cross, that signifies a potential bullish movement to the target area.
Macroeconomic:
The possibility of a Rising Yield usually means the investors expect a higher interest rate in the future. Therefore, they are selling their bonds holding.
All other explanations are presented on the chart.
The roadmap will be invalid after reaching the target/support area.
"Disclaimer: The outlook is only for educational purposes, not a recommendation to put a long or short position on the ID05Y"
Why Corporate Bonds are not a good option for Retail InvestorsCorporate bonds or tradeable debt instruments issued by corporations are a type of fixed income security. Given the recent media attention and the rising demand for fixed income investments among retail investors, it may come as a surprise that they are not suitable for all investors. Corporate bonds have different risks associated with them than other fixed income investments like savings accounts, money market funds, and even municipal bonds. If you are considering investing in corporate bonds or are already holding some in your portfolio, here is why you should avoid them as a retail investor
What is a Corporate Bond?
A corporate bond is a debt instrument issued by a corporation to raise money. Corporate bonds typically have a set maturity date after which the outstanding principal will be repaid. There are many kinds of corporate bonds, including investment grade and high yield, government and non-government, and they can be issued in local or foreign currencies. Corporate bonds are often traded on the secondary market, which means they are liquid and can be bought and sold easily. Investors earn a return on corporate bonds by receiving interest payments and by the increase in the bond’s value as it matures. The interest rate on a corporate bond is based on factors like the company’s credit rating, the length of time the bond is outstanding, and the bond yield in the market at that time. Corporate bonds are typically less liquid than stocks, and may have shorter holding periods, especially if you purchase them on the secondary market.
Risks of investing in Corporate Bonds
Corporate bonds are considered a form of debt financing, and as such, there are risks associated with holding them. The main ones are default, liquidity, and interest rate risk. - Default risk - Investing in corporate bonds entails the risk that the issuing company will default on the payment of interest or the repayment of principal. However, since corporate bonds are issued by companies in different industries, there is a low probability that they will all default at the same time. - Liquidity risk - The risk that you will not be able to sell the investment in a timely fashion at a price that is attractive to you. - Interest rate risk - The risk that if you hold the investment until maturity, you will earn a lower rate of return because interest rates will have risen in the meantime.
Why you should avoid Corporate Bonds as a Retail Investor
While corporate bonds may be suitable for institutional investors, they are not a good option for the average retail investor. For one, you will have to educate yourself on the various types of corporate bonds, their risks and returns, and what kind of companies you should be investing in. Even if you are successful at taking this on, you are likely to end up with a very concentrated portfolio, which brings us to the next problem. The other issue is that retail investors typically hold a small number of bonds and these bonds are often concentrated in a few issuers. This is not a good strategy because if a company defaults, you could lose a large portion of your capital. This is clearly a bad strategy.
So, How about Investment grade debt ETFs?
LQD, In a rising interest-rate scenario. The bonds' tenure is clearly working against them, especially since unemployment continues to fall at an astonishing rate. This is not the time to invest in this ETF if the Fed raises interest rates to combat inflation.
In order to completely comprehend this analysis we must know how important the duration is, while investing in bonds.
Duration is an important topic. It is the bond's effective maturity, which means it is oriented to something lesser than the time of the bond's final payment since part of the bond's value, generally from coupons, happens earlier in the bond's existence. If a bond has a longer effective maturity at a fixed interest rate, it indicates that investors are tied to an interest rate that was once market for a longer period of time, and if rates increase as they are currently, you will be bound to an uneconomical rate for a longer period of time. Simply put, longer term bonds lose value more severely when interest rates increase.
How maturity of a these bonds (Duration) is affecting LQD
Unemployment has gone down despite the increased rates, which has surprised many analysts. The Phillips Curve is back in force, where low unemployment yields high inflation if inflation is kept down, and contrary to common perception, Consumer spending has declined, but unemployment is so low that it might rise again unless the Federal Reserve, which is committed to lowering inflation, continues its anti-inflation campaign. The Federal Reserve has raised rates as well as given gloomy recession predictions, and more banks are following its lead, including the Bank of England. LQD, which has dropped 14% this year, have long-duration bonds, majority of fixed-rate, which is concering for this ETF.
Credit Spread
Global Cooperate Bonds in general
Corporate bonds continuing their strong performance in July, producing $80 million (+76% year on year). July was the most profitable month of the year for CBs . Their revenues in 2022 have exceeded from 2021 ($512 million). Average balances increased by 9.8% year on year, average costs increased by 59% year on year, and usage have increased by 27% year on year. Spreads on non-investment grade and high yield bonds continue to widen as corporate prospects deteriorate owing to weakening consumer demand and stricter financial conditions. In-turns , asset values fall, yields rises, and borrower demand increases. However, CG Debt funds have seen the highest monthly outflows in May and June (-$73.7 billion)
In July, High Yield Bonds enjoyed the relieve rally.
Interest rates vs Corporate Bonds comparison
Alternatives to Corporate Bonds for retail investors
For retail investors, the most advisable option is to go with government bonds. Government bonds have historically offered a lower risk profile compared to corporate bonds. The best way to go about investing in government bonds is to go for a diversified bond fund. Using a bond fund reduces the risk associated with investing in bonds further as the fund manager may hold a large number of different bonds. If you are looking at a short-term investment horizon (less than 10 years), then you could also opt for short-term government bonds. If you have a long-term horizon, then you could consider a long-term government bond fund. Savings accounts, money market funds, and short-term government bonds are very liquid forms of low risk investment options.
Conclusion
It is important to understand that the corporate bond market is not risk-free. When interest rates are rising, corporate bonds are generally falling in price as they are competing against government bonds with lower interest rates. In times of economic uncertainty or when interest rates are rising, the risk of default is generally higher for companies issuing corporate bonds. Thus, it is advisable to invest in corporate bonds only when the economy is growing steadily. For retail investors, the best options are to go with government bonds or short-term government bonds. These are low risk, liquid investments and will help you achieve your financial goals.
US30Y interest rate hike prognosis over the long term.Due to the rising inflation, the Fed has stepped in to reign in inflation. Jerome Powell has stated numerous times he will be aggressive with rate hikes just like Paul Volcker was in the '80s. Powell and Volcker are of the same school of thought.
"Inflation emerged as an economic and political challenge in the United States during the 1970s. The monetary policies of the Federal Reserve board, led by Volcker, were widely credited with curbing the rate of inflation and expectations that inflation would continue. US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983. The Federal Reserve board led by Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981. The prime rate rose to 21.5% in 1981 as well, which helped lead to the 1980–1982 recession, in which the national unemployment rate rose to over 10%." - Wikipedia on Paul Volcker
What does that mean for us?
In essence, lower equity prices, temporary economic contraction and higher lending rates to reign in cheap capital.
Looking at the 30 year US government Bond Yields (US30Y), I am expecting yields to continue to increase from current 3.2% --> 4.1% --> 4.8% --> 5.5% and finally 7.2%. If inflation continues higher, then rates will likely continue to rise over the next few years. The era of cheap lending is over.
Trade safely.
Possible top on 10Y US GOVT Yield? After yesterdays rally it could be that we have hit a possible top in the rise of 10Y Govt Bond Yield.
If this is correct it could signal a possible continued rally in more speculative investments.
If it breaks above and continues up this logic will be invalidated, and further downside to speculative assets may enroll.
Not financial advise, just an idea, I learn through doing
doesnt look like risk off/conservative sentiment imho (us10y)bonds have been playing along with the aggressive selling in equities so far, but that looks as if it may be about to change for the near term. if risk off/conservative sentiment were really back in force for broader markets we would see government bond yield continuing to increase as the market drops. what the ten year has been telling me for the past week is that inflows are about to return to stocks for at least a short while. will we v shaped bounce back to all time highs? its almost certain we wont but, much to the chagrin of short sellers and cash hoarders, some sort of long play may be in the cards in the following week, and i imagine bonds could be up next in line at the barber.
PLTR Downward Channel BrokenWith tech indices gaining much-needed momentum last week, lower bond yields helped push Palantir past a key level in price action. Since December of 2020, PLTR had been trending in a downward channel- with lower lows and lower highs being established. On June 2nd, the price seemed to have broken out of that channel and may indicate a reversal in price action if bond yields can continue to decrease. Another move to note was the clear push past its 50-day moving average- a very bullish sign.
In 2020, Palantir generated $1.1 billion in revenue, up 47% year-over-year. Their average revenue per customer was $7.9 million, up 41% year-over-year. Palantir has built its business with customers in the largest defense industry institutions like the U.S. Army, U.S. Navy, and CIA and companies like IBM, Amazon, and Airbus. Because of this, it is important to always keep an eye out for big contracts as their main source of revenue growth (for now).
Predicting thoughts of institutional investors and FedI see many people say on internet that the market is highly volatile and very hard to predict the trend.
In my opinion, institutional investors (even including Fed) have different thoughts about where the economy is heading due to uncertainty.
So, I want to guess what they are probably thinking so that it may give us some clues why the market is acting in this way. (sorry for my poor english)
(1) There are people who think there will be inflation, while others not.
Covid case/death is decreasing in US, UK, Japan, and Germany. This makes us think that the economy is recovering and will lead to inflation, resulting in recent high US10 yield. However, Gold price keeps decreasing. Some probably think that investors are selling Gold (no interest) and buying bond (have interest). Maybe right but maybe not. Gold is hedge asset for inflation (obvious if you compare Gold price vs inflation in the past). Because Gold price keeps decreasing, it means some people think there will be no inflation.
(2) Markets have reflected positive news (decreasing covid case/death, start vaccines, etc).
But have markets reflected any negative news yet? When the economy starts to recover, there will be change in fiscal policy (gov stimulus, investment..) and monetary policy (no more easing) and creditors will collect from companies/individuals liabilities (debt, loan, etc) which have been extended due to the covid. Markets, especially S&P500, will possibly go down sharply when starts to reflect negative news. Maybe, there will be deflation first, then high inflation later. The worst case is stagflation. Who knows. There are many possible scenario.
(3) Fed will possibly try to decrease long-term bond yield.
Even though Powell said he focuses on labor market and stable inflation, long-term bond yield is high (even Fed governor/economist Brainard said she was shocked). If yield keeps increasing, Fed will possibly try to decrease yield by purchasing long-term bond.
Please let me know if you have the same opinions or different ones :)
US10Y Testing a symmetrical level. Potential Resistance.One of the hot topics in the market recently has been the rising bond yields. The US Government Bond 10 year yield traded this week inside a Zone that has formerly been (from 2011 to 2019) a long-term Support level as clearly illustrated on the chart.
With the RSI on the 1W time-frame also entering its Resistance Zone (holding since 1996) and the MACD approaching its own, can this mean that the US10Y has topped? It is not impossible that what used to be a Support Zone, will now turn into a Resistance.
What do you think?
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Probable increase in Chinese government bond yieldsYields are still currently low based on the long-term regression trend.
What does it imply for RMB bonds if we expect a rate increase in the mid-term (independently of exchange rate movements)?
- Avoid long-duration RMB government bonds,
- Prefer short duration or floating-rate ones.