Strange New World

By | July 16th, 2017|Positioning|

We are now starting to see some things in the economy that we have never seen before: Last week, I mentioned some potentially widespread examples of wage declines in particular industries. I think in the past we may have had only a few industries here and there go through wage declines, so the overall wage picture was clearer in tight job markets.  But the advent of technology, globalization, price discovery and improved models of doing business have all contributed to downward pressure in wages (and even negative wage growth) in MANY industries.  So we have a heterogeneous wage picture in [...]

Rates Decision Point

By | July 9th, 2017|Economy|

Gundlach and Dalio were out last week saying that rates have more to climb.  I agree in the longer term (I think ten year yields are more likely to make new highs than new lows), but I’m not sure about direction in the short term.  Nothing in the past few weeks has really changed the “weakish US data and the Fed doesn’t have much to hike” narrative.  The only thing that happened was that some central bankers (especially Super Mario) sounded a little hawkish.  Sounded hawkish, but you know he’s going to act dovish for as long as he can.  [...]

Rates Blowout Potpurri

By | July 2nd, 2017|Economy|

I haven’t been very active the past few weeks – mostly because I have been trying to make sense of how the markets could possibly be flattening when all things have been pointing to a massive steepening: (1) The Fed and ECB Pillars of long rates cracking as they get closer to tapers later this year, combined with (2) higher longer term rates causing equities to correct on a valuation basis.  One would think this double tightening of financial conditions would extend out the Fed’s “gradual” hiking approach.  We did get a reasonable steepening last week, but we are far [...]

An Explanation for the Labor Force and Wages

By | June 25th, 2017|Economy|

One of the by-products of having so many economists (and central bankers) in ivory towers is that they operate under the implicit assumption that if it’s not measurable, it doesn’t exist.  The nice thing about living in middle America is that you get to see how “regular” people live.  One of the things that strike me from living in northern Texas is how many people have “jobs” that are far from mainstream - whether it’s engaging in some sort of part-time consulting (or part-timing in general), or multi-level marketing, or selling products and services online.  It got me to wondering [...]

Unstoppable Force vs Immovable Object

By | June 18th, 2017|Economy|

The next few weeks should be very interesting in fixed income.  On one side, we have the seemingly unstoppable force of the flattening yield curve.  On the other side, we have what looks like a Fed that wants to taper (despite the softer data).  The markets are pricing in almost a 50% chance of hiking later this year, which probably will have a hard time moving noticeably higher barring a turn in the data (so harder for a EDZ7 selloff to lead a flattening).  So we have a “supported” EDZ7, a EDZ7-Z9 that wants to flatten, and a EDZ9-Z2 that [...]

Know Your Enemy

By | June 11th, 2017|Economy|

“Know Your Enemy” - Sun Tzu & Green Day On Friday, we got a 2bp flattening in EDH8-H0.  As mentioned in a previous CA, there is a tendency for the curve to flatten a few days going into the Fed meeting.  Note that I didn’t mention EDZ8-Z0, which was unchanged on Friday.  The price action felt differently on the Zs last week, and may last going into this Fed meeting.  Unlike prior weeks, the Z algo seems to be offering the Z contracts more often than not.  Whether this is just a lightening-up before the FOMC (before further buying) remains to [...]

Conditional Curve Shape

By | June 4th, 2017|Basics|

I think of value on the curve in two ways: (1) bottom-up, and (2) top-down.  Bottom-up would be looking at a small piece of the curve and thinking about the value there, whether it’s a particular Fed meeting, or slope or curvature on a segment of the curve.  This is probably the most common way to come up with a trade idea.  Top-down would be looking at the overall level of rates and asking what implications makes sense for the shape of the curve. On Friday, ten year yields made new “post-election” lows (starting a few days after the election [...]


By | May 28th, 2017|Economy|

As I was watching equities make yet new highs last week despite lower stimulus prospects, increased Presidential turmoil, and weaker data (albeit still constructive), I thought about the ETF phenomenon.  I had mentioned ETFs casually in previous CAs as a source of equity support.  Consider all the 401(k)s, retirement funds, and personal investments that are tied up in passively managed funds.  A lot of that money is just automatically invested at regular intervals.  Workers generally only make allocation changes a “few” times a year.  Since the flow of funds into the ETFs are very regular, there are probably funds that [...]

Fed vs the Markets

By | May 21st, 2017|Economy|

Tens are back near the recent low yields, and Z8-Z0 spread is back near the recent lows.  This is a little surprising, but I suppose the bulls got an assist from Trumpidity.  All other things being equal (ex-Trump), I would have thought we sold off going into the Fed minutes, that may discuss tapering of the balance sheet.  Instead, with the announcement this weekend that Comey would testify after Memorial Day, the markets are going to be more focused on the headlines and less on the Fed. Let’s for a moment ignore Trump/Comey/Russia, take a step back and look at [...]

The Collapse of EDM7-FF Spread

By | May 14th, 2017|Positioning|

The big story on the curve last week was the collapse of the ED-FF spread.  I had been saying for a while now (as recently as the last CA) that EDM7-FF seemed strangely high to the rest of the ED-FF curve.  That finally capitulated last week, with EDM7 rallying 7.5bps, while FFN7 only rallied 1.5bps.  I updated the chart from the Trade Thoughts section last week to show the dramatic changes in the ED-FF spreads in the past week.  You can see that EDM7-FF declined 6.3bps on the week.  Now EDM7-FF looks a little too low on the curve, but [...]