The right time to have gotten short US long bonds was spring 2020. That correction ended a couple months ago, after hitting the bottom of the 40-year-long upward channel and other very clear technical signs. The price is moving up and probably will complete some upward retracement in the coming months, with long rates falling. The 10-year rate is still rising, but hasn't got much further to go. The whole yield curve is going to fall by the end of the year. I'm doubtful whether the Fed will go much further in raising short-term rates, if at all, for the rest of 2022.
I'm completely agnostic about whether that long bond bull market is truly over. A clear sign would be a decisive breaking of that long upward channel.
As for a recession, that was always dubious. In the US (not the Eurodollar), there was no recent USD yield curve inversion, employment growth in the US has been stellar in recent months, and there are few signs (outside of housing) of any inventory build-up. That does not sound recessionary.
I suspect what happened in Q1 was that the nominal growth and inflation rate were estimated pretty well, indicating negative real growth (nominal - inflation). But the Q2 inflation rate was certainly overestimated. It's come off a lot since May. Thus real growth was not so negative and was probably slightly positive.
We're not at all out of the woods, however. The USD will turn down at some point in the next few months, after a big historic peak, and commodity prices will explode.
I'd love to hear what you think will fuel long rates falling, beyond technical indicators (I'm wary of using technicals when structural changes to markets are in process). My understanding is that even if the Fed doesn't raise the FFR any further from here (which I think they will) there is going to be quite some inflow volume needed to counteract QT over the coming months. But hey we shall see! Thanks for taking the time to comment and read my stuff - Kass :)
Aug 12, 2022·edited Aug 12, 2022Liked by Kassia Dol
Reading your stuff is fun! :)
I think inflation will come off until late in the year. Technicals are valuable, but longer-term, you have to look at months, quarters, years, in momentum, channels, resistance, and support. Most people don't zoom out enough.
I'm not sure QT will continue at the pace people think. With inflation dissipating for a while, the Fed will look for some way to back off. Pay close attention to the US dollar trend. It's a few months away from an historic peak.
Meanwhile, next year is going to be very interesting, possibly frightening. The Fed might lose control of the front end of the yield curve. It simply can't raise short rates to anything like what would be needed if inflation surges in a sustained way or we get entrenched wage-price spiral. This isn't 1980. The US economy is far more indebted, relative to income and assets, than back then. Too many business models (private equity, share buybacks, zombie companies with too much debt) would break catastrophically.
The right time to have gotten short US long bonds was spring 2020. That correction ended a couple months ago, after hitting the bottom of the 40-year-long upward channel and other very clear technical signs. The price is moving up and probably will complete some upward retracement in the coming months, with long rates falling. The 10-year rate is still rising, but hasn't got much further to go. The whole yield curve is going to fall by the end of the year. I'm doubtful whether the Fed will go much further in raising short-term rates, if at all, for the rest of 2022.
I'm completely agnostic about whether that long bond bull market is truly over. A clear sign would be a decisive breaking of that long upward channel.
As for a recession, that was always dubious. In the US (not the Eurodollar), there was no recent USD yield curve inversion, employment growth in the US has been stellar in recent months, and there are few signs (outside of housing) of any inventory build-up. That does not sound recessionary.
I suspect what happened in Q1 was that the nominal growth and inflation rate were estimated pretty well, indicating negative real growth (nominal - inflation). But the Q2 inflation rate was certainly overestimated. It's come off a lot since May. Thus real growth was not so negative and was probably slightly positive.
We're not at all out of the woods, however. The USD will turn down at some point in the next few months, after a big historic peak, and commodity prices will explode.
I'd love to hear what you think will fuel long rates falling, beyond technical indicators (I'm wary of using technicals when structural changes to markets are in process). My understanding is that even if the Fed doesn't raise the FFR any further from here (which I think they will) there is going to be quite some inflow volume needed to counteract QT over the coming months. But hey we shall see! Thanks for taking the time to comment and read my stuff - Kass :)
Reading your stuff is fun! :)
I think inflation will come off until late in the year. Technicals are valuable, but longer-term, you have to look at months, quarters, years, in momentum, channels, resistance, and support. Most people don't zoom out enough.
I'm not sure QT will continue at the pace people think. With inflation dissipating for a while, the Fed will look for some way to back off. Pay close attention to the US dollar trend. It's a few months away from an historic peak.
Meanwhile, next year is going to be very interesting, possibly frightening. The Fed might lose control of the front end of the yield curve. It simply can't raise short rates to anything like what would be needed if inflation surges in a sustained way or we get entrenched wage-price spiral. This isn't 1980. The US economy is far more indebted, relative to income and assets, than back then. Too many business models (private equity, share buybacks, zombie companies with too much debt) would break catastrophically.