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Forget the "Santa rally"Forget the "Santa rally," it's time to brace ourselves for a potentially tumultuous 2023 as concerns mount over bond market developments and their impact on Q1 earnings Santa is tired, Kids It is uncertain whether the annual "Santa rally" will occur in 2022 due to the bear market. There are concerns about the recent developments in the bond market and their potential impact on Q1 2023 earnings. Some stocks, such as Amazon, have approached their 2020 lows, which raises the possibility of a "sell the rumor, buy the fact" situation. In the past, when the NASDAQ has experienced a 20% annual drop, negative consequences have followed in subsequent years, with particularly poor performance in the first year. The 10-year treasury yields have reached their highest levels since November and the Federal Reserve may be unable to provide support as it did in 2008, putting portfolios at risk in the coming year. Most strategists expect market prices to remain around current levels by the end of the year, though some have forecasted SPX values of 3400, 3650, and 3725. A shooting star-style weekly candle on the Bond market has signaled potential significant drops in the S&P 500, ranging from 18-20%. There has been a rotation in market performance in the past month, with sectors such as energy, utilities, financials, staples, healthcare, and defensive stocks performing well, while semiconductors, tech, consumer discretionary, clean energy, and solar have struggled. This trend, known as stagflation, has also been reflected in the performance of assets like gold and the GDX. Valuation compression has also been observed in the market, particularly in the clean energy sector. The VIX, or volatility index, has reached levels similar to those seen during the Global Financial Crisis, raising concerns about a potential fear-driven market in 2023. The U.S. two-year yield and 10-year yield have also risen, with the potential for inflation to increase due to recent Covid outbreaks and supply chain disruptions. The high yield market has weakened, with the rejection of topping islands and a deviation from the usual two. Hairy Bonds Why is the bond market like a box of chocolates? You never know what you're gonna get! Bonds have recently experienced a sharp decline, largely due to expectations for the federal funds rate and the potential for further COVID-19 lockdowns. This is also contributing to concerns about inflation and the ability of the Federal Reserve to effectively combat it. As a result, the performance of bonds has been impacted, as they tend to do better in environments with rate cuts. The Federal Reserve's slower pace of cuts suggests it may take longer to support the economy and potentially puts additional pressure on economic fundamentals and company valuations. The S&P 500 has seen significant losses on specific days in 2022, including September 13th, May 18th, June 13th, April 29th, and May 5th. These days have resulted in drastic percentage moves, with some as high as 4.3%. In the past month, there has been a rotation in market performance, with sectors such as energy, utilities, financials, staples, healthcare, and defensive stocks performing well, while semiconductors, tech, consumer discretionary, clean energy, and solar have struggled. This trend, known as stagflation, has also been reflected in the performance of assets like gold and the GDX. Valuation compression, or a decrease in the price-to-earnings ratio, has also been observed in the market, particularly in the clean energy sector. It is important to continue monitoring key levels and considering the potential impact on portfolios. Yield those Funds FUN FUNDS! The Federal Funds rate, also known as the benchmark interest rate, is the rate at which banks lend and borrow overnight funds from each other to meet their reserve requirements. It is set by the Federal Reserve, the central banking system of the United States, and is used as a tool to achieve its monetary policy objectives. Over the past two decades, the Federal Funds rate has had a significant impact on the stock market, particularly the S&P 500 index (SPX). In general, changes in the Federal Funds rate can affect the stock market in a number of ways, including through the cost of borrowing, the level of economic growth, and investor sentiment. During the early 2000s, the Federal Reserve implemented a series of interest rate cuts in response to the dot-com bubble and the 9/11 terrorist attacks, which helped to boost the stock market. The SPX reached an all-time high in 2007, just before the onset of the global financial crisis. In response to the crisis, the Federal Reserve implemented a series of aggressive interest rate cuts, which helped to stabilize the market and contribute to the recovery of the SPX. Since the recovery from the financial crisis, the Federal Reserve has generally maintained a low interest rate environment, with the Federal Funds rate hovering around 0%. This has been supportive of the stock market, as low interest rates can make stocks more attractive to investors by reducing the opportunity cost of investing in stocks relative to other asset classes. However, as the economy has improved and the stock market has reached new highs, the Federal Reserve has begun to gradually increase the Federal Funds rate. While the impact of these increases on the stock market has been relatively limited so far, some analysts have raised concerns that further increases could lead to a slowdown in the market. Currently, in 2022 leading into 2023, there are no signs yet of the Federal Reserve cutting or tapering rates as the market continues to decline, marking a period of demand destruction. This suggests that the Federal Reserve may be hesitant to use monetary policy as a tool to support the market in the current environment. Instead, the Federal Reserve may be looking to continue rate hikes towards 2000 or 2008 levels. See chart In addition: also see Interesting Inflation! The "Interesting Inflation" indicator is a technical analysis tool that is designed to provide traders with information about the rate of inflation in the United States. It is designed to work on monthly charts and uses data from the Consumer Price Index (CPI) to calculate the average rate of inflation over a specified period of time. On the chart, the light blue to orange line represents the average rate of inflation, while the dark blue line represents the trend in the inflation rate for the month of December. The green line represents U.S. interest rates. The indicator includes a number of inputs, including a toggle to show the inflation rate for the month of December and a setting to enable or disable the display of U.S. interest rates. It also includes a number of plots, including plots for the U.S. inflation rate and U.S. interest rates. To use the "Interesting Inflation" indicator, traders can simply add it to their chart and adjust the input settings as desired. The indicator will then display the average rate of inflation and, if enabled, the U.S. interest rates on the chart. Traders can use this information to understand the current inflation environment and to make informed decisions about their trades. In addition to the average rate of inflation, the "Interesting Inflation" indicator also includes a plot for the inflation rate in the month of December. This can be useful for traders who are interested in understanding the trend in inflation over the course of the year and how it may affect the market. In November 2022, the United States saw a 7.1% increase in prices compared to the previous year, according to the monthly consumer price index (CPI) for goods and services. The CPI, which measures the rate of inflation, shows the percentage change in the price of a basket of goods and services over time. Inflation in the United States has been particularly high in 2022 due to the COVID-19 pandemic, supply chain issues, and the Russian invasion of Ukraine. The annual inflation rate in the United States has risen from 3.2% in 2011 to 8.3% in 2022, indicating a decrease in the purchasing power of the U.S. dollar. According to data from the International Monetary Fund, the U.S. CPI was approximately 258.84 in 2020 and is expected to reach 325.6 by 2027, compared to the base period from 1982 to 1984. In November 2022, the monthly percentage change in the CPI for urban consumers in the United States was 0.1% compared to the previous month. Inflation is a significant economic indicator and is being closely watched in countries around the world. Brazil saw an inflation rate of 8.3% in 2021 compared to the previous year, while China's rate stood at 0.85%. Like a Bottle! The yield curve represented in blue on the bottom is the graphical representation of the relationship between bond yields and their corresponding maturities. In general, long-term bonds tend to have higher yields than short-term bonds, as investors demand a higher return to compensate for the additional risk associated with tying up their money for a longer period of time. This results in a normal yield curve, where long-term yields are higher than short-term yields. However, in some cases, the yield curve may become inverted, with short-term yields exceeding long-term yields. This can occur when investors are concerned about the future outlook for the economy and are willing to accept lower returns on long-term bonds in exchange for the added security of a shorter investment horizon. One specific aspect of the yield curve that is often monitored is the spread between the 10-year and 2-year yields. When the 10-year yield is lower than the 2-year yield, it is known as a yield curve inversion. A yield curve inversion is often viewed as a bearish sign for the stock market, as it can indicate that investors are concerned about the economic outlook and are becoming more risk-averse. Historically, yield curve inversions have preceded recessions and bear markets, as investors become less willing to take on risk and demand safer, lower-yielding investments. As a result, a yield curve inversion can be an important signal for traders to consider when evaluating market conditions and making investment decisions. One historical example of a yield curve inversion preceding a market crash is the global financial crisis of 2008. In early 2007, the yield curve inverted, with the yield on the 10-year Treasury bond falling below the yield on the 2-year Treasury bond. This was a clear warning sign that investors were becoming increasingly concerned about the economic outlook and were seeking out safer, shorter-term investments. As the year progressed, the financial crisis deepened, with the housing market collapsing and major financial institutions experiencing significant losses. The stock market, as measured by the S&P 500 index, reached its peak in October 2007 and then began a steep decline, eventually bottoming out in March 2009. The yield curve inversion was just one factor contributing to the financial crisis and market crash, but it was an important warning sign that investors should have paid attention since it is currently inverted, which has historically preceded a recession within the next two years. However, the size of the inversion does not necessarily determine the severity of the recession. While the current inversion is larger than previous ones, it does not necessarily mean that the upcoming recession will be worse. In addition, the stock market's recent behavior is not indicative of a burst bubble, meaning that the potential decline in the market during the recession may not be as severe as previous ones It's worth what you pay for it In the first quarter of 2023, earnings will be in focus for the market. The recent sell-off in stocks, particularly those such as Amazon that have almost reached 2020 lows, has raised concerns about what will happen next. The 10-year Treasury yields have risen to their highest levels since November, which could indicate a longer period for the Federal Reserve to combat inflation and support the economy. These factors, along with the high rates of Covid outbreaks and the potential for stagflation, have contributed to the rotations seen in the market, with energy, utilities, financials, staples, healthcare, and other inflation plays performing well, while semiconductors, tech, consumer discretionary, clean energy, and solar have struggled. The VIX, or volatility index, has also reached levels similar to those seen during the Global Financial Crisis, raising concerns about a potential fear-driven market in 2023. The U.S. two-year yield and 10-year yield have also risen, with the potential for inflation to increase due to the recent Covid outbreaks and supply chain disruptions. The high yield market has also weakened, with the rejection of topping islands and a deviation from the usual two to one ratio with the S&P 500. These factors could all impact market performance in the coming year. Fearing Futures The US dollar futures are currently looking strong, with indications of accumulation in the market. This is supported by the recent closure of nice wick rejections off the lows and a move above 104. The two-hour chart shows evidence of accumulation at this point, with a critical bottom and big rejections at a certain level, as well as a double bottom formation. If the market breaks above 104, there is potential for a bigger trade to reach 107. Despite negative sentiment towards the US dollar recently, most trend lines show a break through. It is important to note that a strengthening US dollar may not be positive for the US stock market. Gold has been exhibiting a series of higher lows and has broken to a new high. However, it is important to be cautious when trading gold at this time of year due to large spreads and illiquidity. Gold is currently rejecting these levels and it is important to monitor the weekly chart for any potential break and close above a certain price, which could lead to a drop met by strong demand. Oil stopped at 81 and has fallen off, with wick rejections in the 81-82 range. The two-hour chart for oil is difficult to interpret at this time, with no new lows. It is important to monitor the market for a break below a certain price, which could indicate a potential move to the downside. King Elon, the Musk The performance of Tesla (TSLA) has been a key focus in recent market analysis. According to the provided text, TSLA has recently moved above the 104 level, indicating some form of accumulation in the market. This is supported by the presence of "nice Wick rejections" at this level and the establishment of a new high, followed by a pullback to the 618 Fibonacci level where buyers were found again. While sentiment towards the US dollar has been negative, the trend lines suggest that the currency may continue to strengthen, which may not be positive for the US stock market as a whole. However, TSLA's performance may not be directly impacted by this trend. Instead, the focus is on whether TSLA can break above the 104 level and potentially reach a bigger trade with a target of 107. It is recommended to buy dips in TSLA at this time, although caution is advised due to the potential for large spreads and illiquidity in the market around the new year. Overall, the performance of TSLA will be closely watched in the coming week, as key indicators such as long leg doji candles suggest indecision or equilibrium in the market. It is important to exercise patience and react to developments rather than attempting to predict them, as the market for TSLA may be challenging to trade in the short term. The Tesla stock price has experienced significant volatility recently, with the stock reaching new highs and then falling off. This has resulted in many traders experiencing stop loss triggers and margin calls. The market has been bearish on tech stocks, particularly those with high valuations, and this has weighed on the overall market. It remains to be seen how the market will react to Q1 earnings, but it is expected to be a significant event that could impact the direction of the market. In the meantime, traders should keep an eye on key levels and be prepared for potential volatility. Weighing a Giant Apple's weekly close is significant because if it goes below the low formed in June, it may indicate that the biggest stock in the world is facing significant headwinds. There may be rallies, but they may be sold due to the stock approaching key levels. The Gap close for Apple is also relevant to Amazon, which is approaching its 2020 low at around 81.33. This may cause some buyers to recommit and trigger a lot of sell signals, as well as margin a lot of people's stop losses. Semiconductors have continuously sold off due to concerns about valuations and the impact on tech stocks, particularly in the market. It is possible that this could be due to selling rumors ahead of Q1 earnings. The Dax has been more technical and has sold off after reaching a resistance level. If the market trends sideways over the next few days, it may trap options money. The US30 has held up relatively well, but it has not yet reached a new high above 33,000. There may be gaps left behind in the area between 32,500 and 33,000. The US500 has formed a bearish flag and may test its 200-day moving average. If it breaks down from this pattern, it may indicate that the market is heading lower. The Nasdaq has been underperforming and may test its 50-day moving average. The Russell 2000 has been lagging and may test its 50-day moving average. The US dollar has been in a range and may test its 200-day moving average. Gold has formed a bearish flag and may test its 200-day moving average. Oil has formed a bearish flag and may test its 50-day moving average. The 20th is a significant options expiration date with almost 5 million units, and there is a large number of puts stacked compared to calls. This may indicate that the market may rally initially and then sell off later. Bitcoin has pulled back to a key level and needs to rally through 17,000 again to potentially reach 17,500 to 17,600. However, the current outlook is negative and there is a potential for it to go lower. The market trend has been for rallies to be met with sell demand due to risk-on and risk-off assets, with Bitcoin being a risky asset. In general, it is expected to trade between $9.5k and $11.5k See charts: TLDR Bond market developments and their potential impact on Q1 2023 earnings Santa rally may not occur in 2022 due to bear market Some stocks, such as Amazon, approaching 2020 lows NASDAQ has experienced 20% annual drop in past, negative consequences in subsequent years 10-year treasury yields at highest levels since November, Federal Reserve may not provide support Market prices expected to remain around current levels by end of year, some S&P predictions of 3400, 3650, 3725 Shooting star-style candle on market signals potential significant drops in S&P 500 Rotation in market performance in past month, with energy, utilities, financials, staples, healthcare performing well, and semiconductors, tech, consumer discretionary, clean energy, solar struggling Stagflation trend reflected in performance of assets like gold and GDX Valuation compression in clean energy sector VIX at levels similar to Global Financial Crisis, potential fear-driven market in 2023 U.S. two-year and 10-year yields have risen, potential for inflation due to Covid outbreaks and supply chain disruptions High yield market has weakened, rejection of topping islands and deviation from usual two Earnings in focus for market in Q1 2023 Sell-off in stocks raises concerns about future, 10-year Treasury yields at highest levels since November Factors such as high Covid rates and potential stagflation contributing to market rotations Potential for additional fiscal stimulus, potential for vaccine rollouts to impact market It is important to monitor key levels and consider protective measures for portfolios heading into 2023 If you want to continue, good luck, Chuck! The Blackest of Rocks In a recent article, BlackRock Vice Chairman Philipp Hildebrand explains that the Great Moderation, a four-decade period of stable activity and inflation, is over and that we are now in a new regime of greater macro and market volatility. This new regime is characterized by a recession that is foretold and central banks that are on course to overtighten policy in an effort to tame inflation, leading to persistent inflation and output volatility, rate hikes that damage economic activity, rising bond yields, and ongoing pressure on risk assets. Hildebrand and the BlackRock Investment Institute team suggest that a new investment playbook is needed to navigate this new regime, with three key themes: pricing the damage, rethinking bonds, and living with inflation. They recommend balancing views on risk appetite with estimates of how markets are pricing in economic damage, taking more granular views by focusing on sectors, regions, and sub-asset classes, and considering tactical and strategic investments in inflation-linked bonds. According to Mr. Hildebrand and the team at BlackRock, we have entered a new regime characterized by persistent inflation and output volatility, central banks pushing policy rates to levels that damage economic activity, and ongoing pressure on risk assets. This new regime is being driven by production constraints such as aging populations leading to worker shortages and the pandemic shift in consumer spending from services to goods causing shortages and bottlenecks. Central banks' policy rates are not equipped to resolve these production constraints and are left with a trade-off between crushing demand to achieve their inflation targets and allowing for more inflation. As a result, a recession is likely on the horizon, but as the economic damage becomes more apparent, central banks may stop their rate hikes even though inflation will not fully return to target levels. There are also long-term trends such as aging populations, persistent geopolitical tensions, and the transition to net-zero carbon emissions that are expected to continue to constrain production capacity and cement this new regime. In the report "Navigating Markets in 2023" published by BlackRock, it is noted that navigating markets in 2023 will require more frequent portfolio changes.In determining tactical portfolio outcomes, BlackRock plans to consider two assessments: their assessment of market risk sentiment and their view of the economic damage reflected in market pricing. BlackRock is currently at its most defensive stance, with options for turning more positive, especially on equities. The company is also underweight in nominal long-term government bonds in each scenario in the new regime, which is their strongest conviction in any scenario. BlackRock can turn positive in different ways, either through their assessment of market risk sentiment or their view on how much damage is reflected in market pricing. A recession is imminent as central banks attempt to control inflation. In contrast to past recessions, loose policy will not be used to support risk assets. As a result, the traditional strategy of "buying the dip" is not applicable in this context of increased macro volatility and trade-offs. Instead, it is necessary to continuously reassess the extent to which central bank actions are damaging the economy and factoring this damage into investment decisions. In the U.S., the impact can be seen in rate-sensitive sectors, such as the housing market, as well as declining CEO confidence, delayed capital spending plans, and a depletion of consumer savings. In Europe, the energy shock is exacerbated by tightening financial conditions. The ultimate economic damage will depend on the measures taken by central banks to reduce inflation. The author's approach to tactical investment is influenced by their assessment of market participant risk appetite and the extent to which damage is reflected in equity earnings expectations and valuations. They expect central banks to stop raising rates and for activity to stabilize in 2023, but do not believe that earnings expectations currently factor in even a mild recession. As a result, the author is currently underweight on developed market (DM) equities on a tactical horizon. However, they are prepared to become more positive as valuations better reflect economic damage and risk sentiment improves. The recent increase in yields has made fixed income assets more attractive to investors who have been seeking yield for a long period of time. Blackrock takes a specific approach to investing in this environment, rather than taking broad, aggregate exposures. They believe that the case for investment-grade credit has improved and are raising their overweight position both tactically and strategically. They believe that these assets can hold up in a recession due to the fortification of company balance sheets through debt refinancing at lower yields. Agency mortgage-backed securities, a new tactical overweight, can also serve a diversified income role. Short-term government debt is also attractive at current yields, and Blackrock has created a separate tactical view for this category. In contrast, Blackrock does not believe that long-term government bonds, which have traditionally protected portfolios during recessions, will serve this purpose in the current environment. They argue that the negative correlation between stock and bond returns has reversed, meaning that both can decline simultaneously. This is due to the likelihood that central banks will not implement rapid rate cuts during recessions that they have caused in an effort to bring down inflation to policy targets. Instead, policy rates may remain higher for longer than the market expects. Investors may also demand higher compensation, or term premium, to hold long-term government bonds due to high debt levels, increasing supply, and rising inflation. Central banks are decreasing their bond holdings and Japan may cease purchases, while governments are continuing to run deficits, leading to the private sector having to absorb more bonds. As a result, Blackrock remains underweight on long-term government bonds in both tactical and strategic portfolios. High inflation has caused cost-of-living crises, leading central banks to take action to bring down inflation. However, there has been little discussion about the impact on growth and employment. Blackrock believes that the narrative around the "politics of inflation" is on the verge of shifting as the negative effects become more apparent and the "politics of recession" take center stage. They also believe that central banks may be forced to stop tightening in order to prevent financial cracks from becoming more severe, as seen in the UK when investors reacted negatively to fiscal stimulus plans. Despite the impending recession, Blackrock expects that inflation will persist above policy targets in the coming years. They attribute this to normalization of spending patterns and a decrease in energy prices, as well as long-term constraints such as aging populations, geopolitical fragmentation, and the transition to a low-carbon world. Blackrock's strategic views have reflected this new regime, with an overweight to inflation-protected bonds for several years. However, market expectations and economist forecasts have only recently started to acknowledge the persistence of inflation. Blackrock believes that markets are underappreciating inflation and, as a result, have a high conviction, maximum overweight to inflation-linked bonds in strategic portfolios and maintain a tactical overweight regardless of how the new regime plays out. Blackrock says, the best way to predict the future is to examine what their companies are saying. They have a 2023 playbook that is ready to adapt quickly depending on how markets price economic damage and their risk stance evolves. Blackrock prefers short-term government bonds for income, due to the increase in yields and the reduced need to take on risk by seeking yield further out the curve. They are adding to their overweight position in investment grade credit, which they believe may be better positioned than equities to weather recessions due to higher yields and strong balance sheets. They also like U.S. agency mortgage-backed securities for their higher income and credit protection through government ownership of the issuers. Blackrock's expectation for persistent inflation relative to market pricing keeps them overweight in inflation-linked bonds. They remain underweight on long-term government bonds and overall underweight on equities, as they do not believe that the upcoming recession is fully reflected in corporate earnings expectations or valuations, and disagree with the assumption that central banks will eventually support markets with rate cuts. Instead, they plan to focus on sectoral opportunities resulting from structural transitions, such as healthcare amid aging populations, in order to add granularity while staying underweight overall. Among cyclicals, they prefer energy and financials, with energy sector earnings expected to ease from historically high levels while still holding up amid tight supply and higher interest rates benefiting bank profitability. They also like healthcare due to attractive valuations and likely cashflow resilience during downturns. “We expect views to change more frequently than in the past. Our stance heading into 2023 is broadly risk-off, with a preference for income over equities and long-term bonds. “ The Great Moderation, which allowed for relatively stable strategic portfolios, will not be effective in the current regime. Instead, they believe that portfolios will need to be more nimble. They do not expect a return to conditions that will support a joint bull market in stocks and bonds like the one that occurred in the prior decade. They argue that the asset mix is more important now and that getting the mix wrong could be four times as costly as it was during the Great Moderation. This is because the zero or even positive correlation between the returns of stocks and bonds means that it will take higher portfolio volatility to achieve similar levels of return. Blackrock sees private markets as a core holding for institutional investors, but is broadly underweight due to the potential for valuations to fall and the expectation of better opportunities in the future. They maintain a modest overweight on developed market (DM) equities, but believe that the overall return of stocks will be greater than fixed-income assets over the coming decade. Within fixed income, they prefer to take risk in credit, specifically public credit rather than private. They remain overweight on inflation-linked bonds and underweight on nominal DM government bonds, with a preference for short maturities to generate income and avoid interest rate risk. Blackrock says that the aging population is a significant factor in the current production constraints and will continue to be a problem in the future. As the population ages, the share of the U.S. population that is of retirement age and therefore not in the workforce is increasing. This is a major contributor to the decline in the labor force participation rate, which measures the share of the adult population that is in work or actively looking for work. The aging population is also negative for economic growth because it means that the available workforce will expand much more slowly in the coming years, leading to reduced production capacity and continued inflation pressure. Additionally, rising government spending on care for the elderly is expected to add to debt. Within equities, Blackrock views the healthcare sector as attractive due to its focus on developing medicine and equipment to meet the needs of an aging population. To conclude their playbook: “A bottom-up look at what our companies are telling us is probably the best lens we have into the future.” The 2023 playbook is ready to quickly adjust depending on how markets price economic damage and our risk stance evolves. They prefer short-term government bonds for income: The jump in yields reduces the need to take risk by seeking yield further out the curve. U.S. two-year Treasury yields have soared above 10-year yields. See the chart. They break out shortterm Treasuries as a neutral. They add to their overweight to investment grade credit. Higher yields and strong balance sheets suggest to them investment grade credit may be better placed than equities to weather recessions. They like U.S. agency mortgagebacked securities (MBS) for their higher income and because they offer some credit protection via the government ownership of their issuers. And their expectation for persistent inflation relative to market pricing keeps them overweight inflation-linked bonds. Long-term government bonds remain challenged as they have described, so they stay underweight. In equities, they believe recession isn’t fully reflected in corporate earnings expectations or valuations – and they disagree with market assumptions that central banks will eventually turn supportive with rate cuts. They look to lean into sectoral opportunities from structural transitions – such as healthcare amid aging populations – as a way to add granularity even as they stay overall underweight. Among cyclicals, they prefer energy and financials. They see energy sector earnings easing from historically elevated levels yet holding up amid tight energy supply. Higher interest rates bode well for bank profitability. They like healthcare given appealing valuations and likely cashflow resilience during downturns. A new strategic approach The Great Moderation allowed for relatively stable strategic portfolios. That won’t work in the new regime: They think they will need to be more nimble. They don’t see a return to conditions that will sustain a joint bull market in stocks and bonds of the kind they experienced in the prior decade. The asset mix has always been important, yet their analysis posits that getting the mix wrong could be as much as four times as costly as versus the Great Moderation. See the difference between the orange bar and yellow markers on the chart. Zero or even positive correlation between the returns of stocks and bonds means it will take higher portfolio volatility to achieve similar levels of return as before. They see private markets as a core holding for institutional investors. The asset class isn’t immune to macro volatility and they are broadly underweight as they think valuations could fall, suggesting better opportunities in coming years than Now. To read their full report with graphics see this link: www.blackrock.com Fear the VIX If you're a bear on the market, a VIX at 45 might have you doing a happy dance - but for bulls, it could be a different story. The S&P 500 index is a widely-recognized measure of the performance of 500 large publicly-traded companies in the United States. It is often used as a benchmark for the overall health of the U.S. stock market and has generated an average annual return of around 9% since its inception in 1957. The index reached an all-time high in early 2020 but experienced a steep decline due to the COVID-19 pandemic, although it has since recovered much of those losses and is currently trading near all-time highs. The CBOE Volatility Index, or VIX, is a measure of the expected volatility of the S&P 500 index over the next 30 days. It is calculated using option prices on the S&P 500 index and is commonly referred to as the "fear index." A high VIX suggests that investors expect the stock market to be more volatile in the near future, while a low VIX indicates that investors expect relatively stable market conditions. For a bearish investor, or someone who expects stock prices to fall, a high VIX may be viewed as an opportunity to profit from falling stock prices. This is because a high VIX can be a sign of increased uncertainty or fear in the market, which may be caused by negative factors such as economic recession, geopolitical tensions, or natural disasters. On the other hand, a high VIX may be seen as a warning sign for bullish investors, who may decide to reduce their exposure to the stock market or implement protective measures to mitigate the potential impact of market volatility. However, it's worth noting that the VIX is not a perfect indicator of market conditions and can be influenced by a range of factors beyond just the level of fear or uncertainty in the market. Additionally, a longer-term mindset bull, or someone with a long-term bullish outlook on the stock market, may actually welcome a spike in the VIX as it can sometimes signify a market bottom, or a point at which stock prices have reached a low point and are likely to start rising again. In this case, the high VIX may be viewed as an opportunity to buy into the market at a discounted price, with the expectation of generating returns over the long run. As such, it's important for investors to consider their individual investment goals and horizon when evaluating the significance of the VIX and other market indicators. On the Chart Al La Carte On the chart, we can see the daily movements of both the S&P 500 index (SPX) and the VIX. Historically, there has been a correlation between a spike in the VIX and a market bottom in the SPX. One of the most notable examples of this relationship was during the Global Financial Crisis (GFC) in 2020, when the VIX reached over 80. The reversal of the VIX marked the bottom of the market on March 16, 2020, a few days before the SPX hit its bottom on March 23. Since the GFC, we have seen similar, although smaller, spikes in the VIX and corresponding market bottoms. These include October 28, 2020, January 24, 2022, March 8, 2022, March 19, 2022, June 16, 2022, and October 12, 2022. It's important to watch for divergence between the VIX and the SPX to understand if a market bottom may be forming. See chart One strategy that some investors use is to watch for divergence between the VIX and the SPX. When the VIX is rising and the SPX is falling, it may be a sign that the market is approaching a bottom. Conversely, when the VIX is falling and the SPX is rising, it may indicate that the market has reached a bottom and is starting to recover. One example of divergence between the SPX and VIX occurred in late 2018, when the SPX was in a long-term uptrend and the VIX was trending downwards. This divergence may have indicated that the market was approaching a top and that investors should be cautious about taking on additional risk. Another example of divergence occurred in March 2020, during the COVID-19 pandemic. The SPX experienced a steep decline due to the economic impact of the pandemic, while the VIX spiked to over 80. This divergence may have indicated that the market was approaching a bottom and that it was a good time for investors to start looking for opportunities to buy into the market. One example of a technical analysis tool that can be used to understand the relationship between the SPX and the VIX is the "Vix_Fix" indicator. This indicator uses a number of inputs, including the lookback period for standard deviation, the Bollinger Band length, the Bollinger Band standard deviation, the lookback period for percentile, and the highest and lowest percentiles, to calculate the Williams Vix Fix (WVF). The WVF is a measure of the momentum of the SPX and is plotted on the chart as a histogram. The "Vix_Fix" indicator can be used to identify periods of divergence between the SPX and the VIX, as well as to identify potential points of market reversal. When the SPX is pushing lower and the VIX is pushing higher, it may be a sign that the market is approaching a bottom. Conversely, when the SPX is rising and the VIX is falling, it may indicate that the market has reached a bottom and is starting to recover. See chart In conclusion, it is important for investors to keep track of various economic indicators, such as the S&P 500 index, VIX, federal fund rate, and yield curve, in order to make informed investment decisions. While a bear market may be welcomed by some investors, it is important to consider the potential impact on the economy and individual investments. Understanding the historical trends and correlations between these indicators can help investors navigate bear markets and make the most of their investment strategy. It is also crucial to consider a range of factors and not rely on a single source of information when making investment decisions. Overall, staying informed and understanding the market can help investors make the most of their investments, even during a bear market. If you made it this far, congratulations, you are one dedicated reader and thank you for your time!
UShort
by OccamsPhazer
4
2 Year-10 Year Yield curve deeply invertedIf there is any tell-tale sign that a massive recession is coming, it is this: 2-Year - 10-Year yield curve inversion. If you look back in history you would see that every time this yield spread has inverted, the economy and the stock market has gone into a recession. The problem is that this is the deepest inversion from an historical perspective - deeper than 2008 inversion. This can play out very badly for the S&P500, and the stock markets in general. Will S&P500 be in big trouble because of this?
TVC:US10YShort
by Cashbusa
1
Bond Market Signals Potential Trouble for the Federal ReserveIn recent weeks, the bond market has been sending a strong signal to the Federal Reserve: it may be making a serious mistake. The yield curve, which measures the difference in interest rates between short-term and long-term bonds, is currently more inverted than it has been since the early 1980s. An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates. This can be a cause for concern because it can indicate that investors are expecting economic growth to slow in the future. When investors expect the economy to slow, they are less likely to lend money for long periods of time, leading to higher interest rates on short-term bonds and lower interest rates on long-term bonds. The current yield curve inversion has many experts worried. In the past, an inverted yield curve has often been a reliable predictor of a recession. In fact, every recession in the past 50 years has been preceded by an inverted yield curve. One reason for the current inversion may be the Federal Reserve's recent interest rate hikes. The Fed has raised interest rates several times in recent years in an effort to prevent the economy from overheating. However, these rate hikes may have had the unintended consequence of slowing economic growth. Despite the potential risks, experts believe that the current yield curve inversion may not be as concerning as it seems. They argue that other factors, such as the strong job market and low unemployment rate, suggest that the economy is still in good shape. In the end, only time will tell if the bond market's concerns are justified. However, the Federal Reserve will need to closely monitor the situation and be prepared to take action if necessary to prevent a potential recession.
FRED:T10Y2Y
by JoelWarby
2
Yield Curve Inversion Continues: More Pain Ahead Later?This post will provide a quick macro update concerning the yield curve inversion in US bond markets, which have often (though not always) been followed by a bear market in equities. Note the various yield curve inversions in the 10-2 Treasury yield. This compares the 10Y US Treasury yield with the 2Y US Treasury yield , and when the 2Y yield exceeds the 10Y yield, the curve inverts (the result of 10Y - 2Y is a negative number). The yield curve has now become inverted for the second time this year. The inversion is deepening, and it's been 10 consecutive days of inversion territory. The inversion is entering its 3rd week of the 10s-2s being inverted. This is starting to exceed the inversion in 2005-2006 that lead to the 2 year bear market b/w 2007-2008 and it's approach about 1/2 the depth of the inversion in 2000, which was a severe bear that led to the NDC falling 70% over 2 years. The chart above allows an easy visual comparison between prior inversions (labeled by date) and the current inversion. The black line on the chart represents the Nasdaq 100 NASDAQ:NDX , also tracked by the NASDAQ:QQQ ETF traded on US securities exchanges. The current inversion presages a higher likelihood of more pain in equities and other risk assets . An inversion does not necessarily lead to an immediate market decline as history shows, but it tends to lead to recession, which in turn is associated with extended bear markets (rather than a more minor 1-3 month correction as was seen with the Covid crash in 2020). There was a minor inversion between the 10s-2s Treasuries in March 2022, 3 months ago, but that one only lasted 2 days. The current inversion has lasted now for about 2 weeks and looks likely to continue. The current inversion has become more deeply negative than even the 2006 inversion, which presaged a severe-2 year bear market associated with the Great Financial Crisis. But so far, it only approaches half the depth of the 2000 inversion, which presaged a different but severe 2-year bear market that saw the Nasdaq lose 70% of its value (albeit with several powerful multi-week / month bear rallies interposed in between major declines).
TVC:US10Y
by SquishTrade
23
S&P 500 / M2 Money Stock, George Tritch's CycleNow we have a period of high inflation that, in my opinion, will continue for some time. Even if it falls (as the M2 money stock decline points out), we may have a second reversal wave of inflation during the revival after the current bear market. For this reason, a lot of people are waiting for a pivot, which, according to them, will mark the low. This statement is wrong. After pivots, we usually observe the biggest drops on the S&P 500. Similarly, with yield curves - they are inverted, which is a very strong bearish signal. At this point, I invite you to look at the related ideas about the 2008 analogy. The above chart shows the value of the S&P 500 index divided by the M2 Money Stock, which in general presents the situation on the money market - the amount of money in the economy. So we can see how the share prices relate to it. In addition, I added George Tritch's cycle (arrows), which has been assigned the most lows and highs in the past. Shaded arrows indicate less important turning points for this chart. The timing is more important than my projected path; it is only for visualization. The bottom of the current bear market should be in 2023. The next bull market with a high around 2026 should be less generous than the last. The major low of the actual cycle should be around 2032.   And that's all. Enjoy.
SP:SPX
by MichaelFX_ICT
Why is the S&P500 ready to go short again?Why is the S&P500 ready to go short again? This question can't be answer, I'm not a magician and no one will know what the market is going to do, but let's see what's giving me the hint of the short idea. Let's start from the Real GDP . We're going to consider the Real GDP which I'll be calling GDP during the post. After doing some research you can see how the S&P is directly correlated with the GDP, and that the GDP is directly correlated with the S&P, if one goes down in most cases the other one goes down and vice versa. If we lag the GDP by 6 months, we can see how over 80% of the times if the GDP goes in a direction, within 6 months will be followed by the S&P. There is only one scenario where we're not interested into trading, which is the ones where the GDP goes down and the S&P goes up. This is the most important rule in analyzing the market. If we want to see how the S&P is going to move than we have to predict the GDP, how can we predict the GDP? By looking at the Macroeconomics and Microeconomics data. In this post I'll only take into consideration the US Yield Curve otherwise the post is going to be too long and y'all lazy people won't read it. According to Investopedia, the yield curve graphs the relationship between bond yields and bond maturity. More specifically, the yield curve captures the perceived risks of bonds with various maturities to bond investors. The U.S. Treasury Department issues bonds with maturities ranging from one month to 30 years. As bonds with longer maturities usually carry higher risk, such bonds have higher yields than do bonds with shorter maturities. Due to this, a normal yield curve reflects increasing bond yields as maturity increases. However, the yield curve can sometimes become flat or inverted. In a flat yield curve, short-term bonds have approximately the same yield as long-term bonds. An inverted yield curve reflects decreasing bond yields as maturity increases. Such yield curves are harbingers of an economic recession. The S&P is also in a bear market since it's lost the 20% from its highest point and once our fundamental analysis is done, we can move on the technical part, it's not useless but can give us a good timing. Here in the chart, you can see the first cup and the second cup which are giving us the first hint of a continuation in down trend. Obviously, we need more confirmations but that's a first suggestion of what's going to happen. I know it's a short and quick post, but I'll update this or create a new post once I understand how the ideas section of TradingView works :) Good luck traders!
FX:SPX500Short
by DennisMantineo
Inflation & Interest Rate Series – Below 5.3% is Crucial for CPIContent: • Why CPI must be below 5.3%? • Can we invest or trade or hedge into inflation? Disclaimer: • What presented here is not a recommendation, please consult your licensed broker. • Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises. Stay tuned for our next episode in this series, we will discuss more on the insight of inflation and rising interest rates. More importantly, how to use this knowledge, turning it to our advantage in these challenging times for all of us. Micro 5-Year Yield Futures 1/10 of 1bp = US$1 or 0.001% = US$1 3.000% to 3.050% = US$50 3.000% to 4.000% = US$1,000 See below ideas on the previous videos for this series.
CBOT_MINI:5YYU2022Education
by konhow
3
The yield curve has inverted, how to overcome this?Content: • Difference between interest rate and yield? • Why it is important to note of yield curve inversion? • How to tell when Yields are inverted? • What is the long-term trend for interest rates and yields • How to manage a rising yield? Disclaimer: • What presented here is not a recommendation, please consult your licensed broker. • Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises. 1. Difference between interest rate and yield? i. Interest rates are a benchmark for borrowers and ii. Yields are for lenders. For eg. investors to the U.S. government iii. Both interest rates and yields move in tandem together 3. Why is it important to note yield inversion? i. For eg. - when the return on a 30-years yield is lower than the 2-year yield, that indicates a ii. For lenders or investors – a pessimistic outlook, a reluctance to commit their money to the longer-term bond, they prefer short-term deposits as the market is unclear in the long-term. iii. For borrowers – most individuals or companies have shorter-term borrowing, for eg a 2 years fixed rate or a bridging loan. When the yields are inverted, suddenly they find them paying more on interest rates repayment. Since interest rates and yields move in tandem, expect the shorter-term lending rates to go higher. This will hurt companies and individuals who have higher leverage items on their books. If you are into shorter-term trading, do look into the market with live feed data. I am starting an inflation series, in the next video tutorial, we will discuss why inflation is happening not just in U.S. but all around the world. Micro 10 Years Yield Futures 0.001 = US$1 3.488 = 3488 x US$1 = US$3,488 3188 to 3488 = 300 x US$1 = US$300
TVC:US02Y
by konhow
Yield cruve 10-2 vs BTCAn inverted yield curve instead slopes downward and means that short-term interest rates exceed long-term rates. Such a yield curve corresponds to periods of economic recession, where investors expect yields on longer-maturity bonds to become even lower in the future. Moreover, in an economic downturn, investors seeking safe investments tend to purchase these longer-dated bonds over short-dated bonds, bidding up the price of longer bonds driving down their yield.
TVC:US10Y
by seperslp
USD CommentaryHope this idea finds you happily making a fortune today! The epic rally in the dollar has displayed appreciation relative to all other currencies within the last 12 months. Parity with the Euro: 1 Euro = 1 USD Canadian Dollar CAD -2.5% Australian Dollar AUD -6.1% Swiss Franc CHF -6.6% New Zealand Dollar NZD -9.8% British Pound GBP -11.6% Japanese Yen JPY -16.7% Havoc for gold bulls: But Zen? Isn’t a strong dollar good for the nation?! ‘ Good ’ is relative. >A strong dollar makes imports cheap, and exports more expensive. >This is the reason we have seen a steep drop in the rate of growth within the ISM Manufacturing Purchasing Manager Index. >Currently at a value of 52.8, so yes we are in growth mode, but the rate of growth has sharply dropped Let’s not forget the inflation woes domestically as purchasing power of consumers sharply drops. Why is the dollar mooning? >It is no different then the crypto yield farming bonanza of yesteryears. The market is chasing yield. However, unlike degens risking it all, the dollar is the global reserve currency and American bonds are backed by the greatest empire, the USA baby!! >When the Federal Funds rate is raised by the Chairman Powell, the Government Bond Yield rises. When the yield rises there is demand for the dollar to capitalize on this yield. Bloomberg provided additional context through highlighting the ‘Dollar Milkshake Theory’ of Brent Johnson of Santiago Capital. Here is a summary: 1. All currencies are terrible fiat. 2. The dollar is slightly better because it’s the global reserve currency used the most. i.e. ‘the tallest midget’ 3. When the Fed stops making dollars — the froth rises to the top of the “milkshake”— demand for existing dollars goes up. Jamie Dimon (JPM) was in an interview forecasting the drop in growth last year, which ended up materializing. He said, with the inflation onset coming JPM were preparing in advance by essentially having a large position in the greenback. It sounds counter-intuitive to be long the dollar when inflation is high, however the logic is sound and the dollar has indeed outperformed all other currencies. When it comes to technical analysis some are claiming we potentially are going to ‘ double top ’: This would be an extremely bearish reversal if it were to materialize however, the underlying fundamental strategy the Fed is laying out would most likely have to change as well. The Fed at this point vocally intends to have further rate increases which will push yield, hurt growth and strengthen the dollar. Is a double top possible? Yes. Do I think it will happen? ... My crystal ball is foggy . That is essentially asking, will the Fed take on a recession to wipe out inflation? I do not know. They are the masters of double speak ( soft landing ) right now. If the dollar were to breakout we can see R3 would most likely be a pivot point. Playing that breakdown in the dollar while being potentially long gold, equities or crypto could be lucrative in a short swing. Essentially, seek to make a tailwind out of a headwind. Equities are likewise having a hard time dealing with this sky-high dollar. Let me know your thoughts mates! If I missed something important share it with the community so we can grow together.
TVC:DXY
by ZenMode
4
Yield curve inversion cyclesUS10Y treasury yield minus US02Y treasury yield is an accurate predictor of impending economic recession. Here we compare the 10 Aug 2022 yield curve inversion low point to the low points in 2007 and 2000 that pre-dated the Great Recession and Dot Com stock market crashes. While a small inversion (below 0) does not always pre-date a recession, inversions as low as the current 10 Aug 2022 always have. Even more interesting is when you zoom in to the daily chart. Here we see the 10Y - 2Y moving back towards 0 from 10 Aug 2022 through 22 Aug 2022, even as stocks have begun to decline since release of the Fed minutes and recent commentary from Fed officials about the importance of continuing with additional rate hikes based on current inflation data.
TVC:US10Y
by theagileagent
5
Yield Curve vs SPX We're quickly approaching all time lows on the 10yr-2yr yield inversion chart. However, in the past the rates inverted at the end of the rate hike cycle. This time we inverted from the start of the hikes and aren't even half way to the Fed's goal of 3.5%. So we are in uncharted territory with the bond market. Note, crashes followed the yield inversion, as rates started falling. The crashes happened anywhere from immediately to 2 years after initial inversion, but 6 months seems to be the median. Does that mean we run up and/or chop sideways until rates come down? Perhaps. however it tells me we're due for another crash when the yield turns positive again. I'm not sure what to make of the rate hike bear trend line, but we are about to breakout of it, for sure. Perhaps we get more hikes than we bargained for. However, inflation numbers should improve soon with oil & metal prices falling, while food is about to go through harvest season. I anticipate some bull run off that. Inflation relief might be short lived, however.
FRED:T10Y2Y
by Nicklaus68
4
Yield Curve Inversion Imminent (3M/10Y)Well, it has happened again! We of course see the 2yr/10yr yield curve inversion: It has been like this for some time. However, all I hear is: “But this time it is different!” The U.S. curve has inverted before EACH recession since 1955, with a recession following consistently between 6-24 months after. Only one time in this time-frame has this signal failed. I am hearing now, the only yield inversion that matters is the one the fed is paying attention to. The 3-Month/10-Year. Let’s keep in mind the Federal Funds Rate will continue to rise, most likely at a more modest pace and maybe with less regularity. The point being that the 3month is highly correlated to the federal funds rate: With the federal funds rate rising, and the 10y dropping we can speculate that even this 'curve comparison of curves' will also invert. WHAT DOES THIS MEAN TO ME? Inflation is certainly high, and the federal funds rate rising will reign it in with the sacrifice of jobs & growth The yield curve impacts businesses & consumers The higher borrowing cost will impact car loans, and mortgages We are already getting data indicating a cooling housing market Many Americans live off plastic credit cards. When the short-term rate rises the US Banks raise the benchmark rates for consumer loans, credit cards and other borrowing products. This increases cost for consumers. Many banks love this environment. They enjoy the spread. When the yield curve steepens, banks borrow at lower rates and lend at higher rates. When the curve is flatter their margins are squeezed, which deters lending.
TVC:US03MY
by ZenMode
35
The Real Cost of Fed Rate HikesCBOT_MINI:10Y1! CBOT_MINI:2YY1! The Federal Open Market Committee (FOMC) is scheduled to meet on July 26-27. Market widely expects a 75-basis-points (bps) Fed Funds rate increase, from current target of 1.50%-1.75% to 2.25%-2.50%. The call for a 100-point hike, while still feasible, is weakened after U.S. gasoline price dropped 70 cents per gallon in the past month. New data hints that the runaway inflation may be contained. Federal funds Rate is the interest rate that banks charge each other to borrow or lend excess reserves overnight. It is the most important global interest rate benchmark, as it directly or indirectly influences the borrowing cost for governments, corporations, and households. By the end of July, Fed Funds would have gone up by 2.25% (assuming 75 bps hike in July) from zero before March. The Fed is not afraid of raising rate even higher until inflation moves back to its 2% policy target. How much will a higher interest rate cost for government, business, or household? I will illustrate the impact of 100bps rate increase in this analysis. All data comes from either the Fed or USdebtclock.org, unless otherwise noted. Total Debt : By the end of Q1 2022, the total debt outstanding in the U.S. by both public and private sectors is $90.1 trillion. Mind-boggling. What does the number mean? • U.S. GDP was $23.0 trillion in 2021. Debt-to-GDP ratio is 3.92. It would take all Americans four years to pay off their debt, without spending or paying interest. • US population is 332,403,650 as of January 2022 per US Census Bureau. Debt per capita is $270,949. Each time a baby is born, he or she already owes more than a quarter million dollar. US National Debt : $30.6 trillion based on USdebtclock.org real-time calculation. This is just the debt owed by Federal government and various federal agencies. • National Debt to GDP ratio: 133%. • Federal tax revenue is estimated at $4.4 trillion in 2022. If our government just levies taxes and does nothing else, it will take seven years to pay off the debt. • Federal budget is $6.0 trillion in 2022, with budget deficit running at $1.6 trillion. Interest on debt is $440 billion, the fourth largest budget item. If interest rate goes up 100 bps across the yield curve, federal government will have to come up with $306 billion extra to service the debt. • Federal budget in 2022: $6.0 trillion o budget deficit $1.6 trillion o Interest on debt $440 billion (4th largest budget item) o Remark: $306 billion extra to service the debt, if interest rate goes up by 100bps • When all the rate hikes are over, annual debt interest payment could be over $1.0 trillion. It would become the 3rd largest budget item, behind Medicare ($1.4 trillion), Social Security ($1.0 trillion) and ahead of Defense ($751 billion)! State and Local Government debt : $3.3 trillion, of which $2.1 trillion from state governments and $1.2 trillion from local governments. • If interest rate goes up by 100 bps, state and local governments will have to come up with $33 billion extra to service their debt. • We may expect tax hikes from state and local governments, while public services may be cut back at the same time. US Corporate Debt : $11 trillion, which includes all debt issued by non-financial corporations domiciled in the U.S. • If interest rate goes up by 100 bps, American businesses will have to come up with $110 billion extra to service their debt. • We may expect higher prices for goods and services, as businesses pass on the interest cost to consumers. • Companies with high debt ratio may increase the chance of delinquency. US Household Debt : $23.5 trillion. This includes mortgage, auto loan, credit card loan and student loan, etc. • Personal debt per citizen is $70,304. If interest rate goes up by 100 bps, each person will have to come up with $703 extra a year to service their debt. • American families are fighting with a higher cost-of-living on multiple fronts. If the U.S. falls into a recession, their financial situation will worsen significantly. • Mortgage delinquency is expected to rise significantly. The remainder, approximately $21 trillion, is outstanding balance of credit instruments issued by banks and other financial institutions. Believe it or not, we have only just scrubbed the surface of our mounting debt problem. Most government liabilities are unfunded or underfunded. Each year, the Federal Government borrows new money to pay off the maturing debt. Medicare, Medicaid, and Social Security are pay-as-you-go programs. Government taxes current workers to pay for the benefits of retirees, without any money saving up for current workers. No one has a crystal ball if the benefits are still there when they reach retirement. With such a depressing future ahead of us, are there any trading opportunities? The answer is yes. I am counting on the inverted yield curve to return to historical normal. Yield curve plots the interest rates on government bonds with different maturity dates, notably three-month Treasury Bills, two-year and 10-year Treasury Notes, 15-year and 30-year Treasury Bonds. Bond investors expect to be paid more for locking up their money for a long stretch, so interest rates on long-term debt are higher than those on short-term. Plotted out on a chart, the various yields for bonds create an upward sloping line. Sometimes short-term rates rise above long-term ones. That negative relationship is called yield curve inversion. An inversion has preceded every U.S. recession for the past half century, so it’s seen as a leading indicator of economic downturn. On July 21st, the yield on two-year Treasury notes stood at 3.00 percent, above the 2.91 percent yield on 10-year notes. By comparison, two-year yields were one percentage point lower than the 10-year yields a year ago. Why are we seeing yield curve inversion now? Short-term yield directly responded to Fed rate hikes. It has gone up 225 bps in five months. Longer term yields are determined by credit market supply and demand. The prospect of an upcoming recession held off lending by businesses and households alike, keeping the yields relatively stable. In my opinion, yield curve inversion could not sustain for long. Borrowers would flock to lower rate debt, pushing up demand for longer term credit. Market force would revert the yield curve to a normal one with interest rates on long-term debts higher than those on short-term ones. Are there any instruments we could leverage to trade the reversal of yield curve inversion? Long the Spread of CBOT Micro 10-Year Yield (10Y) and 2-Year Yield (2YY) . Traditional Treasury Futures are quoted in Treasury Notes price, which can be viewed as the present value of future payments that bondholder will receive – interest payment every six months and the return of principal at par value at maturity. Micro Yield Futures are more intuitive. They are quoted in yield directly. On July 22nd, August 10Y Yield Futures (10YQ2) was settled at 2.819. August 2Y Yield Futures (2YYQ2) was settled at 3.06. The 10Y-2Y spread is -0.241. The 10Y-2Y spread has been positive in recent years. It turned negative in the beginning of July as we experienced the inverted yield curve. I expect the spread to return to historic normal - a positive number, in the coming months. To trade Micro Yield futures, margins are $240 for 10Y and $330 for 2YY. A long spread can be constructed by a Long 10Y and a Short 2YY positions. The great thing about a spread trade lies with the fact that you don’t have to be right in predicting the direction of interest rates. Spread will be widened if 10Y rises faster than 2YY. Even in a falling rate environment, if 10Y fell less than 2YY, the spread will be enlarged too. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CBOT_MINI:10Y1!Long
by JimHuangChicago
1
US 10YR Yield: A Possible Correction Ahead? US 10YR Yield has reached a yearly high at the 3.200% earlier this month. From the new high, the price retraced and retested the support level of 2.700%. In the 4-hour chart, we can spot a potential head and shoulder pattern. Therefore, we will observe if the price will break below the neckline area in the near future. If the neckline is broken, then we expect a period of correction for the US 10 YR yield. What does it mean for the market if the yields start to fall? Intermarket Relationship (Theoretical Explanation): Yields and Bonds: Inversely Correlated *Yield can be considered an interest rate. Because most bonds pay a fixed interest rate, investment in bonds becomes more attractive if interest rate falls. Therefore, two are inversely related. Yields and USD: Positively Correlated *A rising yield indicates USD appreciation while a fallling yield indicates USD depreciation. We can relate this relationship with the recent FOMC raising the interest rates, which has reduced the money supply to preserve the value of USD. As a result, yields rose and bond prices fell, and USD currency became more attractive to hold due to reduction of money supply. Yields and Commodities: Inversely Correlated *If yields increase, USD will appreciate; therefore, an expensive USD would lead to a fall in commodities prices because most of the commodities are priced in USD. Yields and Stock Market: Inversely Correlated *High yield environment leads to expensive loans, which discourage individuals from investing. Therefore, if yields enter into a period of correction, we first expect the USD, or the US Dollar Index to fall, which would lead EURUSD, GBPUSD, AUDUSD, etc to rise and USDCAD, USDCHF, etc to fall. From the charts of those USD pairs, we can spot that the retracements have already begun from their recent highs and lows. Check out our ongoing trading ideas below :)
TVC:US10Y
by NicoBeau_Capital