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The technical cross asset setup:

Macro Risk Advisors: The Navigator – market strategy & technical analysis, Markets at a defining moment (October 5)

A defining moment is at hand for risk markets globally, according to John Kolovos at Macro Risk Advisors. He says the weight of evidence suggests that this is still a buyable decline, and a low is forthcoming to end this correction. However, Kolovos says a failure of the S&P500 to hold 4145 will strongly suggest that the bear market has returned. Indeed, he says with real rates ripping higher than initially expected, punishing the average stock, we are near the point where it might be time to jump ship on another horse. Click here if you would like to speak to the analyst.

Vol:

Macro Risk Advisors: Real rates and swaption vol (October 6)

Shocking fact: The US Treasury drawdown is now greater than the equity drawdown was during the GFC. it helps illustrate the degree of pain being inflicted on the back end of the curve. MRA’s Barry Knapp walks investors through the risks in this short video, pointing out that option markets are reflecting the shift in uncertainty from the front end to the back end of the curve, as reflected in the chart below. As Knapp says, two policy pieces exacerbating each other. In other words, the fact that the Fed, via its ”higher for longer” policy is keeping the curve inverted, and the increased supply, reduced demand factor. This all means most of the buyers of USTs are leveraged. They can’t be buyers of USTs if the curve remains inverted. That then means, as yields rise, the debt servicing costs for the US government spiral. It’s a toxic mix. Click here for the one page note.

Rates:

Forest for the Trees: The global sovereign debt bubble is popping due to the convexity of net effective UST supplies

For more than 2-years Luke Gromen from Forest for the Trees has made the case that the US Treasury market was on shaky ground. It’s been a thesis based on a fairly solid rationale, that now looks all the more realistic. There’s a confluence of factors at play, but it’s firmly grounded on the idea of debt sustainability (or unsustainability) and a belief that US Treasuries are the asset of last resort for investors. Gromen has questioned both assumptions in his work and this is now coming to pass. In this excellent note, Gromen reexamines these risks, what might happen next as yields continue to rise, and how investors should position themselves as the debt bubble bursts. Click here for the full note.

CrossBorder Capital: The Not (Yet) Credit Crisis; Look out for a new acronym: QS! (October 5)

Markets are again testing the boundaries. We are not yet at the cliff-edge, but Treasury yields are hurtling towards it, writes CrossBorder Capital, the liquidity experts. The underlying problem is too much debt and the on-going burden of re-financing it. This ultimately requires more liquidity, CBC say in the note. The Fed has not yet thrown in the towel, but CBC anticipate a new acronym is coming: QS denoting a new policy of ‘quantitative support’ for markets. Click here for the full note.

Roth MKM: More on the rate shock; Current yield levels aren’t justified (October 4)

Michael Darda at Roth MKM says his model for the neutral policy rate and 10-year bond yield suggests both the funds rate and the 10-year yield have overshot to the upside. A catalyst for rates coming down across the curve would likely be some combination of a recession scenario and/or financial accident playing out, he says. Despite the absurdity of 8% fiscal deficits at full employment, history suggests that bond yields almost always drop between cycle peaks and troughs with swings in the fiscal balance not correlated to movements in yields, according to Darda. The only exceptions have been inflationary recessions in which Fed credibility was torpedoed, something at odds with the fact that real rates – not inflation expectations – have led yields higher this year, he adds. Click here for the full report. Click here if you would like to speak to the analyst.

Quant Insight: Rising bond yields; what breaks next (October 4)

The back-up in bond yields is reaching that point where global investors are wondering what breaks next, according to Quant Insight. History has taught us that moves like these often end with some kind of financial accident, says the firm. This short video showcases how Qi can give multi-asset investors a ready reckoner; a quick way to identify which pockets of the market are potentially most at risk. The video shows how a Watchlist can be created with your curated list of assets that you deem the best proxies for financial stress. And how that list provides a quick and easy way to eyeball where: macro conditions are important; which assets are already pricing in bad news; and which assets are potentially complacent and therefore vulnerable. Click here for the note. Click here if you would like to speak to the analyst.

A. Gary Shilling: Sell-off of Treasurys (October 2023)

Treasurys have suffered large price declines as interest rates rose says A. Gary Shilling. He says the Fed is probably not through raising its policy rate; in September, it signalled that rate cuts next year will be fewer than earlier forecast. Inflation is receding, says Shilling, but not yet down to the Fed’s 2% target, and energy prices are now leaping. While goods inflation has receded, services inflation, of more concern to the central bank and driven by labor costs, is still rising 5.4%, he notes. Click here for the full report. Click here if you would like to speak to the analyst.

Gavekal Research: Where next for US Treasury yields? (October 2023)

Long-dated US treasury yields have risen steeply in recent months with the 10-year yield climbing to a 16-year high at 4.68%, says Gavekal Research. At this level, US treasuries are at an attractive risk-adjusted valuation relative to US equities, but the upside momentum on yields is formidable, says the firm. So, asks Gavekal, in a year’s time, will 10-year yields be higher or lower than today? The argument for lower yields rests on expectations that warning signals which have been flashing red over recent months are accurate, and that the US will tip into recession over the next year, says the firm. The case for still-higher yields notes that the long-heralded recession has not yet arrived, and that US treasury issuance continues apace while fewer buyers are stepping forward, says Gavekal. For now, the balance of risk for yields remains to the upside, says the firm. Click here for the full report. Click here if you would like to speak to the analyst.

Ned Davis Research: Living on the edge (October 5)

Largely due to political dysfunction, the US is not behaving like a responsible Aaa-rated country, raising its default risk, says Joseph Kalish at Ned Davis Research. He says investors may find the US less attractive at the margin. However, Kalish maintains value is starting to return to the bond market, as the term premium normalizes. Click here for the full report. Click here if you would like to speak to the analyst.