Inside The Bond Market
The Fed Should Pause And It Will
Liquidity reduction (QT) by global central banks is already showing up in slower M1 growth in all G3 countries. Slower M1 growth has led economic slowdown by about twelve months.
Bond Yield Proxy—A Tool For Equity Investors
We created an equity basket that can track the movement of the U.S. 10-year yield. Overall, it does a good job of capturing the major moves.
Risk Aversion Index: New “Lower Risk” Signal
Despite the recent signal whipsaws, we have been cautious toward all risky assets and we continue to recommend defense amid higher volatility across all asset classes.
Divergence Everywhere—A Cross-Asset View
The 40 bps jump in the 10-year yield, a 2-standard-deviation event, occurred within a five-week win-dow. Interestingly, historical data doesn’t suggest a continued increase in the near term.
Risk Aversion Index: New “Higher Risk” Signal
We have been leaning toward the defensive side despite the recent signal whipsaws and we continue to recommend caution in light of the increase in volatility across all asset classes.
Mid-Term Elections—History Might Not Be A Good Guide
While mid-term elections are rarely big market movers, this year’s election demands more attention as it has the potential to alter the balance of political power in Washington.
U.S. Rates—Driven Higher By Real Yields
The recent move higher in rates had broader support as other major markets also saw higher rates.
Risk Aversion Index: New “Lower Risk” Signal
Our Risk Aversion Index fell sharply last month and triggered a new “Lower Risk” signal. Caution is still strongly recommended, and we favor higher-quality credit within fixed income.
EM Crisis? Not There Yet
What some EM countries are going through is a classic sequence that can potentially lead to a full-blown EM crisis.
Yield Curve Proxy—A Tool For Equity Investors
The increasingly greater attention given to the yield curve by equity investors has prompted us to come up with an equity basket that can track the movement of the yield curve. Overall, it does a reasonably good job of capturing the major moves.
Risk Aversion Index: New “Higher Risk” Signal
Our Risk Aversion Index reversed higher last month and triggered a new “Higher Risk” signal. We recommend a defensive stance within fixed income.
Risk Barbell Or Middle Of The Road?
The underperformance of investment grade credit this year prompted the question of whether a risk-barbell portfolio of safe Treasuries and risky high-yield bonds may offer better performance than a middle-of-the-road portfolio of 100% investment grade corporate bonds in a highly-uncertain environment.
2018 Time Cycle—Mid-Year Update
2018 has been very atypical so far. But if the historical pattern is any guide, a near-term pull back should be expected in most equity markets, followed by nice year-end rallies.
Risk Aversion Index: A New “Lower Risk” Signal
Our Risk Aversion Index fell enough last month to generate a new “Lower Risk” signal. This is certainly not a “no brainer” risk-on signal. We recommend higher quality spread products within fixed income.
Investment Grade Widened More Than High Yield: Implications & More
As credit spreads widened, something rather unusual happened: investment grade Corporate bonds performed far worse than High Yield bonds.
Risk Aversion Index: Stayed On “Higher Risk” Signal
We believe the negative impact of central bank liquidity reduction is here to stay for the foreseeable future. We recommend defense within fixed income.
All Crowded Trades Are Vulnerable—Even The Yield-Curve Flattener
Bond market volatility picked up quite a bit in May but the higher-low/higher-high pattern in the 10-year yield is still intact, indicating the primary uptrend has not reversed.
Risk Aversion Index: Stayed On “Higher Risk” Signal
Volatility among non-equity asset classes has gone up noticeably while the VIX dipped lower. We still expect volatility to stay high and continue to play defense within fixed income.
Risk Aversion Index: Stayed On “Higher Risk” Signal
We expect volatility to stay high and still recommend defensive positions within fixed income.
Rates & Credit At A Major Crossroads—A Few Things To Watch
April saw a valiant attempt by the U.S. 10-year yield to crack the upper band of the multi-decade downtrend channel (around 3.0%-3.05%).
Trade War & Libor—More Bark Than Bite?
Isn’t a trade war more bark than bite? We think a full-blown trade war may be eventually negotiated away but the process is not necessarily painless to investors.
U.S. Investment Grade Corporate Bonds: Maintain Neutral
Our overall view toward credit has turned decidedly cautious over the last couple months and that includes our long-term favorite.
Risk Aversion Index: Stayed On “Higher Risk” Signal
While concerns about a trade war might be easing and the credit market has been largely unaffected by the surge in Libor rates, we have to recognize the fact that Trump’s policy focus has become increasingly market-unfriendly while global central banks are in a liquidity-reducing mode.
U.S. Rates: Looking For A Dip
The U.S. 10-year ended the month 15 bps higher but non-U.S. bonds fared much better with bond yields in Europe and Japan 4-5 bps lower.
More On The Dollar Bear Market
A potential trade war (not quite there yet) is not good for the dollar as it will inevitably invite retaliation and sour sentiment toward dollar assets.
Risk Aversion Index: A New “Higher Risk” Signal
While the late rebound in risky assets pared back earlier losses, weakness was observed in all major risk asset classes. We continue to recommend defense for the time being.
Anatomy Of A Dollar Bear Market
With the dollar index breaking below the 2017 low, we believe the dollar bull market that started in 2011 (based on the trade-weighted dollar index) is most likely over.
Risk Aversion Index: Turned Higher But Stayed On The “Lower Risk” Signal
Our Risk Aversion Index turned higher last month but stayed on the “Lower Risk” signal as of the end of January. The first few days of February brought a big surge in this index and would suggest a “Higher Risk” stance for the near term.
Four Divergences—A Steepening Correction
While we still believe flattening is the more likely scenario over the medium term, we do feel the recent flattening move is a bit overdone and there are several divergences that suggest a short-term steepening correction is in store.
2018 Time Cycle—Beware A Fall Correction
The most common 2018 time-cycle pattern among major markets is a fall correction, with the U.S. and Japan faring better than their European counterparts.