Lower interest rates is the uncrowded trade

I don’t know why people make it so difficult for themselves.

The bond market is ‘more correct’ than the rhetoric or ‘tough talk’ that central bankers provide.

The former isn’t emotional while the latter is and susceptible to biases.

The U.S. 2 year bond yield started rising and forecasting higher interest rates in October 2021, when it passed the 0.30% level.

By the time the Federal Reserve announced its first rate hike on March 17th, 2022, the U.S. 2 year bond yield was 2.20%

I think it is a waste of time speculating or debating if the Fed will ‘pivot’ and change direction.

Firstly, a reversal of current direction is not an automatic occurrence. The Fed can keep rates where they are for a little more.

Secondly and more importantly, the bond market will tell you more.

Currently, 2 year bonds are yielding 4.15%.

Much is priced in and now poised at stretched levels.

The chart below shows the Fed raising rates by a factor of 12 from the 0.25% low.

This is in belated sync with the 11 to 13 fold hikes seen in many other economies while those commodity sensitive nations (where the citizens are least indebted compared to those in the G10) such as Brazil, Chile and Mexico all started hiking rates (trying to fight inflation) between March 2021 and June 2021.

The most crowded trade, thesis and belief is still – for higher rates.

Not many are calling lower rates.

I am.

For various reasons, I think this U.S. 2 year bond yield falls back to the 2.30%-2.60% range in the coming 10-20 months.

Does this mean that the Fed cuts rates into the next year?

Perhaps, Yes. Maybe taking the Fed Funds Rate to 2.75%

But I can’t see how they can raise rates another 1% with out ‘breaking something’.

October 6, 2022

by Rob Zdravevski


Bonds are a Buy !

It’s important to keep things simple.

With all this palaver about interest rates, people want to hear what the action is.

How is one expressing their investing view about the topic?

Bond yields are so stretched, that on a monthly basis, they are ‘this’ Overbought for only the 4th time in 35 years (as expressed in the U.S. 5 year bond yield chart with those circles on it)

If you like fixed interest, then you may consider buying a Bond ETF which owns a spread of such bonds…..

because, inversely those bond prices are at extremely Oversold levels, as the Monthly chart below shows.

I have posted a chart of one of those U.S. traded bond ETF’s

This is the case across the 5, 10, 20 and 30 year maturities.

Disclaimer: not personal advice, do you own research or speak to a licensed professional.

September 27, 2022

by Rob Zdravevski


Everybody Hurts (R.E.M.)

I don’t think the market is about to break but many money managers may.

Peers are speculating whether there are big funds unwinded losing and problem positions.

Perhaps so but that often coincides with the ‘straw which broke the camel’s back’.

Many thought buying government bonds yielding 0.60% for 10 years to be a good bet.

In fact, many thought buying German bonds for a NEGATIVE 0.60% (as shown in orange in the chart below) was somewhat appropriate.

And their reward is………..a 20% loss of capital (with no interest coupon paid), as shown by the blue line of a German Bond (SDEU) ETF.

When you consider that “balanced” funds including those in the pension or insurance business may typically follow a model of allocating 60% of monies to equities and 40% to bonds, they may be double hurting as Germany’s DAX equities Index has fallen 24% from its peak.

That’s the reporting of what happened bit.

Now, many think this is ‘forever’. Many think trends and streaks don’t end, wane or reverse.

Consider the contrarian view to the extremes we are seeing?

September 27, 2022

by Rob Zdravevski


The bond herd is arriving

Much hoopla about U.S. interest rates

Perspective is required.

U.S. year bond yields have never seen 8 consecutive weeks of rising yields. Stocks and Commodities tend to see streaks lose steam in the 7th or 8th consecutive week.

We are closer to the streak ending.

The U.S. 10 year bond yield has never been Overbought on a Monthly basis, until now.

The U.S. 10 year bond yield has never been extended this many percentage points above its 50 month moving average.

The U.S. 10 year bond yield is near to trading up to 2.5 standard deviations above its rolling monthly mean for only the 5th instance in 40 years.

September 26. 2022

by Rob Zdravevski


30 year bond yield triples

It’s the quantum of the rate rises which I am watching.

When you have a lot of debt and potentially stretched, it doesn’t matter what the absolute interest rate is.

You risk being wiped out if you can’t service the interest payments once your interest cost triples.

The chart below shows the travels of the U.S. 30 year government bond yield.

When rates were 6% in 1993 and then rose to 8% by 1995, it’s only a rise of 33%.

A rise from 5% to 6.7% as seen in 1998-2000 was only 33%.

During 2012-2014, 30 year rates moved from 2.5% to 3.9%. That’s an increase of only 55%.

The current rate cycle equals an increase of 300%.

My analysis is focused on the quantum of rate rises required, in order to temper credit applications and expansion which when combined with rhetoric will hopefully achieve the desired moderation of inflation.

And when we look at the developed world, we are much more closer to the end of the rate hikes than the beginning.

If the quantum of the rate rises expands, then there is risk to that large asset class known as residential real estate.

After all, the citizens of the developed world are awfully indebted while those in the developing economies (mentioned in the post below) have already experienced rate hikes of between 10 and 13 fold.

You can call it ‘front loading’ or anything else, but the cash rates along with 1, 2 or 3 year government yields of the developed world economies have already risen by the same factor of between 10 and 13 times.

So all this energy spent debating on where G12 central banks need to raise the absolute rate to, is futile.

But for the record, Canada currently has the highest interest rate out of all the G12 and a commodity sensitive (exporting) nation, they will a central bank to monitor for they have increased their policy rate 13 fold from 0.25% to 3.25%. The next BOC meeting is on October 26, 2022.

It’s time to get used to a new interest rate base from which central banks will work from and the investing effect is clear.

The absolute cost of capital has markedly increased and the return on investments will be adjusted lower.

September 19, 2022

by Rob Zdravevski


Watching Currencies – AUD/JPY

Correlations – AUD/JPY and Australian 2 year government bond yield

September 5, 2022
by Rob Zdravevski

Super stretched?

It’s not a solid of piece of analysis, but playing with the US 2 year government bond yield and the percentage it has traded above its 200 week moving average, while mean reversion beckons.

July 26,

by Rob Zdravevski


Macro Extremes Alert – U.S. 10’s

U.S. 10 year bond yield are at ‘overbought extremes’.

At 2.41%, it’s kinda done or at the least, at the upper end of being so.

I’ll give a move to 2.6% (that downward sloping resistance line in the chart below) but I’ll say that you don’t want to be shorting bonds at these levels.

Beyond the subjective notion that short bonds is a crowded trade and the chart below showing a unison registration of a 70 RSI reading (it’s 12th visit in 30 years) with a 2.5 weekly standard deviation above the mean, my other work tells me that the 10’s are the most stretched since October 2018.

In fact, other than 2018 and now, we haven’t seen the 10’s this ‘stretched’ at any other time in 40 years of data.

Additionally, the U.S. 10 year bond yields have doubled in 8 months and quadrupled in 18 months.

If you think 2.4% is low compared to where we once came from, the quantum of this ‘recent’ move should count for something.

p.s. once again, tune in to the noise amongst the market pundits, chat rooms and the media again. ‘Today’s’ hyper-ventilation is now about falling bond market yields.

Similar to recent moments seen in Nickel, Oil, Crypto, Wheat, Chinese equities etc etc, consider the opposite side of what the crowd is crowing about.

It’s funny, I just can’t seem to remember ‘them’ saying anything when interest rates were 1%……

March 23, 2022

by Rob Zdravevski



Watching interest rates closely

Watching some macro signals today.

In the chart below, I’m watching the U.S. Year government bond yield.

Notice how over the past 6 weeks, the 10’s are making ‘higher highs’ and ‘higher lows’.

Now, they need to hold 1.265%. If they do, then they should test 1.385%.

If they break 1.385%, then 1.47% and 1.57% are next important levels to test.

Recently, rising interest rates have favoured cyclical and industrial equities, while falling yields have given the ‘technology’ stocks a boost.

September 10, 2021
by Rob Zdravevski

The economy is still healthy

The direction of the Copper/Gold Ratio (HG/GC) is a good indicator for checking on the health of the economy. Think of it as a thermostat.

It is also well correlated to the direction of the U.S. 10 year (the 10’s) bond yield. Often, the HG/GC precedes the move in interest rates.

In a recent post I wrote about the HG/GC’s relationship to the S&P 500.

Today, the short-term direction of the Copper/Gold Ratio has been down and so the 10’s (and S&P 500) have mimicked that.

The longer trend upward trend of the Copper/Gold Ratio remains intact.

Where this ratio trades to and its effect on the 10’s will determine the size of, and where the allocation of capital moves to.

Separately, (on a weekly basis) the 10’s have traded down to 3 standard deviations below its mean. Such a 3-sigma event has foreshadowed higher equity prices.

It’s at an acute point, however the equities bull market continues.

July 21, 2021

by Rob Zdravevski


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