Disclaimer: The following content is an archive of Substantive Research Discovery Trending Themes, as delivered as weekly insights to our paid subscribers. Links to gated content have been removed.
Forest For The Trees: The global sovereign debt bubble is popping due to the convexity of net effective UST supplies (October 3)
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 challenging the 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 re-examines 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 report. Click here if you would like to speak to the analyst.
Macro Risk Advisors: Bond market drawdown surpasses GFC equity drawdown; How to stop the bleeding
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.
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.
CrossBorder Capital: The not (yet) credit crisis (October 2023)
Markets are again testing the boundaries, according to CrossBorder Capital. We are not yet at the cliff-edge, but Treasury yields are hurtling towards it, says the firm. The underlying problem is too much debt and the on-going burden of re-financing it, says CrossBorder. This ultimately requires more liquidity, says the firm. The Fed has not yet thrown in the towel, but CrossBorder anticipates a new acronym is coming: QS denoting a new policy of ‘quantitative support’ for markets. Click here for the full report. 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.
Roth MKM: More on the rate shock, current yields cannot be 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.
Apollo Global: 23% increase in Treasury auction sizes in 2024 (October 5)
Treasury auction sizes will increase on average 23% in 2024 across the yield curve, according to Torsten Slok at Apollo Global. The 37% increase in issuance of 3-year notes and the 28% increase in issuance of 5-year notes will in 2024 stress-test demand for Treasuries in the belly of the curve, he says. In particular, if the Fed next year will start cutting rates and wants to soften financial conditions, says Slok. This dramatic growth in the supply of the risk-free asset is “pulling dollars away” from other fixed-income assets, including investment grade credit, as investors substitute away from spread products toward Treasuries, he says. According to Slok, with the ongoing significant increase in the supply of Treasuries, investors in credit markets need to spend some time on signs of demand and supply imbalances in the Treasury market. The bottom line, he says, is that the world only saves a limited amount of dollars every year, and the significant growth in the size of the Treasury market is at risk in 2024 of crowding out demand for other types of fixed income. Click here for the full report. Click here if you would like to speak to the analyst.
Trahan Macro Research/RSA: A looming mortgage crisis; an NYC case study
Francois Trahan flags up a startling piece published by RSA, or Rent Stabiliazation Association of NYC, the largest trade organization in New York City dedicated to protecting and serving the interests of the residential housing industry. The piece looks at a potential looming mortgage crisis. Click here for the piece.
Trahan has kindly summarised the piece for us below.
It’s estimated that of approximately $4.4 trillion of outstanding commercial/multifamily mortgages, $728 billion (16%) matures in 2023 with another $659 billion (15%) maturing in 2024.
New York City, having among the most multifamily buildings in the country, is especially vulnerable to disruptions and turmoil in this market. These mortgages are overwhelmingly short-term loans, as is typical in the multifamily / apartment building economy. These aren’t the 30-year fixed mortgages that single family homeowners get.
All of the billions of dollars in multifamily loans coming due were taken out at much lower interest rates. Current higher rates – double previous rates, or more – have been steep, quick, and across all parts of the economy.
Regional and midsize banks hold a lot of these loans, as they are typically the lenders closest to the ground and more active in local residential real estate. The exposure of these banks, in apartment buildings and other local businesses, is extreme and puts them in a precarious position. If they stumble or fail, as some very publicly already have, it is the federal government and the taxpayers on the hook for the bailouts.
Economic Perspectives: Global inflation heat maps September/October 2023 (October 4)
Despite the recovery of energy prices and its reflection in transport inflation, there remains a net disinflationary bias among advanced economies as core inflation rates drift lower, says Peter Warburton at Economic Perspectives. Emerging countries, led by China and India, are tilting towards higher inflation again, he says. According to Warburton, the widespread lack of fiscal responsibility presents an ongoing threat to the inflation outlook. Click here for the full report. Click here if you would like to speak to the analyst.
