Gordon T Long

Gordon T Long

Global Macro Research | Macro-Technical Analysis 






The historic lift in bond yields has rapidly changed the investment landscape. Bond holders have experienced ~3.7% losses so far in 2021. It has been one of the worst year-beginning starts since 1999, just prior to the implosion of the Dotcomm Bubble.

However, for new money or through potential equity rotation, currency hedged US Treasuries are suddenly the most attractive to foreigners that they have been in seven years!

The 10Y UST Note now offers Japanese investors 105 basis points of un-leveraged carry. Additionally, the steep yield curve is now offering institutional investors good returns for taking on duration risk. We suspect that against a back drop of rather benign inflation and easy money, investors will be tempted to reach for yield. An upward sloping yield curve is one of the few avenues remaining that provides an opportunity for fixed income investors to boost current cash flow. At the end of the day, taking on duration risk to get any reasonable return on cash will highly likely prove a temptation too great to resist.
According to a recent Morgan Stanley study, since the start of the year, 85% of the cumulative decline in Treasury futures prices occurred in the overnight session. It would appear Japan is almost single-handedly responsible for the dump surge in yields this year! The cumulative downward price movement in Treasury futures has been concentrated in the Tokyo session. Furthermore, after a brief respite in the first week of March, selling in the Tokyo session accelerated dramatically ahead of the FOMC meeting and it continued afterward.
Japanese commercial banks hold a large number of equity shares, and the Nikkei 225 equity index put in its best fiscal year performance in decades. In other words, for the commercial banks, the income from bond holdings wasn’t necessary to make the year a successful one. Consider it one massive pension re-balance ahead of the March 31 fiscal year end… only this one was among commercial banks.
The Japanese Year End is March 31st. With the above 105 basis point opportunity, the rapid rise in treasury yields may about to be rapidly changed? Unless the banks have confidence in the Nikkei 225 index continuing to rise, the much more attractive carry and expected roll-down in the Treasury market will seem very appealing! Japanese banks are likely to start buying significant amounts of US Treasuries again once the fiscal year is over.
This Neutral Rate chart below is from well followed Scott Minerd at Guggenheim. His analysis suggests the recent bond yield lift has now largely run its course with the market now pricing in a neutral rate of 2.35 percent, nearly in line with the Fed’s optimistic long run dots. Their studies indicate that the bond market has had difficulty sustaining rates at or near the Fed’s neutral rate projection and they see no reason to expect a different result this time.
Copper has always been a predictor of economic trends to such a degree that it earned the monikor “Dr Copper”. Like the entire commodity Complex, Copper has risen sharply since the Covid-19 pandemic central bank facilities and stimulus liquidity flows began. However, nothing goes straight up and the chart below (like all commodities) appears set for a hnormal corrective consolidation. Divergence and the MATASII Momentum Indicator (at the bottom) of the chart confirms this.


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