Disclaimer: The following content is an archive of Substantive Research Discovery – Trending Investment Themes, as delivered as weekly insights to our paid subscribers. Links to gated content have been removed.
Year Ahead Consensus: 2024 US Treasury Forecasts; Back to front
In December we collated all of the 2024 Year Ahead Outlooks published (primarily sell side research) to get a sense of the consensus view across the asset classes for this year, and have summarised these in this report. On page 6 you will find a summary of predictions forecasts for US Treasuries. These reports were unanimous. US 10-year Treasury yields will fall over the course of 2024, with the only disagreement being the degree of that yield decline. We would also note that given the late Nov/early Dec publishing dates of these Outlooks, and the speed of the yield decline late in 2023, some of these forecasts have already been reached, but some of the most bullish outlooks forecast US 10-year yields to fall as low as 3.0-3.25%. Click here for the report.
Therefore in light of the ferocious rally through December, and the fact that Year Aheads can date very quickly, we provide a collection of recent research notes below that bring the December’s moves into context. We also provide a collection of notes on liquidity/QT, and US Treasury funding, which plays into the same fixed income theme.
BNY Mellon: iFlow data; Points to ‘buy everything’ behaviour across the curve
iFlow is a combination of $41.7 trillion in asset flows moving through BNY Mellon’s custody and administration business and December’s data shows that that investors view fixed income as more than just a long duration trade. Indeed there has been a sharp increase in purchases across the curve, as the chart below shows. The chart is included in a note they have just published on Fed QT discussions. begins. Click here for the full note.
CrossBorder Capital: The US Treasury Note Is ‘Junk’. The Yield Curve Is Distorted. Yields Must Rise (Jan 2)
CrossBorder Capital reckon the US interest rate term structure has been heavily distorted by Federal Reserve and US Treasury activities, arguing that the 10-year Treasury yield could be 110bp too low. To their minds the ‘True’ yield curve is not signalling a deep recession. In fact, it points to recovery. Click here for the full note.
MI2 Partners: Fading Reflation; Short 10-year Treasuries (Jan 3)
if recent market moves are to be believed, we stand on the cusp of a new reflationary cycle, according to MI2 Partners. They argue that the correlation between stock and bond prices should remain positive if they (MI2) are correct in their view that the economy is back in a structurally inflationary environment, such as the one that persisted before the late 1990s (see first chat in note). The issue that they have with the current set up is that the price action shouldn’t necessarily be confused with a sustainable trend because if assets all go up together, they can just as easily go down. Something has to give, they say.
Indeed, when they look at prices, especially across assets, they don’t scream reflation just yet. MI2 suspect the reflation narrative is more of a function of price action and positive correlation than reality. For markets that have all gone up together, the obvious risk is that we retrace at least some of the moves. Therefore their recommended trade is to short bonds. Click here for the full note.
TS Lombard: Is everyone wrong about inflation (again)? (Jan 9)
The consensus among sell-side analysts is that inflation will gradually converge on central banks’ 2% targets by the end of 2024, according to Dario Perkins at TS Lombard. This consensus aligns with the view that inflation will edge slightly higher in 2025 after interest rate cuts and global economic recovery. However, Perkins highlights the potential risks and the likelihood of an inflation surprise, with geopolitics being the main source of concern. Ongoing military conflicts and geopolitical tensions pose a threat to financial markets and the global economy in 2024. Additionally, Perkins notes the possibility of an era of higher inflation volatility, similar to the 1940s, due to negative supply shocks, extreme weather events, and government efforts for a rapid green transition. Central banks have a window of opportunity to normalize monetary policy before the next supply shock occurs. Click here for the full note. Click here if you would like to speak to the analyst.
Rosenberg Research: History suggests that the bull market in bonds is just starting out (Dec 19)
It’s all about momentum, says Dave Rosenberg in this Dec 19 note. As he quite rightly suggest here, market participants have been underestimating just how far interest rates can go down from here now that the bond bear market has been broken. As the rally was in full swing Rosenberg produced some interesting historical facts that brought the late year 110-basis point plunge in the 10-year yield into context.
He wrote that we have seen ten such declines from a peak over the past forty years. And not once did the fresh bull market stop there. The average additional drop was -200 basis points; the median was -170 basis points; the mode was -150 basis points. So historically speaking, it shouldn’t surprise anyone, other than the bond permabears, that we end up seeing the 10-year T-note yield slice below 2.5% before this thing runs out of gas. Of these other prior episodes, 4 involved recessions, 3 occurred in the context of a financial crisis, and 3 needed none of those, only requiring a big decline in inflation. Click here for the full note. By the way, Rosenberg nailed this recent move in US Treasuries in this piece ”Bonds will have more fun” in late Nov.
Longview Economics: “The Age of Monetarism – BUY (govvie) Bonds” + Stay Overweight Treasuries (Dec 21)
In their latest Quarterly Asset Allocation note Longview Economics maintain an OW position on US Treasuries, although they have reduced the position size from +9pp. to +3pp, but still remain OW relative to benchmark (see tables 1a & 1b ib the note). Despite the large rally, their view on US Treasuries is largely unchanged. That is, bond yields should (continue to) move lower in 2024, given that shrinking money supply (see figure 4c in report) should increasingly generate deflationary pressures in Western economies. That’s the conclusion of a theme Longview call the ‘Age of Monetarism’ (which is laid out in more detail in a note they published last summer here). Inflation risks are therefore skewed to the downside, i.e. a key reason to stay OW Treasuries. Click here for the full report.
Blackrock: Predicting normal, assuming abnormal, reacting to paranormal (January 10)
After an incredibly unique four-year period of abnormality (and even paranormality), Blackrock’s Rick Rieder thinks 2024 could look a lot more “normal” than the past four years; although, we have a heavy amount of humility in staying prepared for abnormal / paranormal. In conclusion, Reider thinks 2024 can be the year of “normal”, and from these starting levels, a year to set positioning and “take a nap”, (Normal economic conditions with the normal set of unpredictable annual Abnormalities with a need to manage any Paranormal events which occur). Fixed income on yield may work for you this year – despite the incredible November-December rally. Click here for the full report. Click here if you would like to speak to the analyst.
Ned Davis Research: Adding to bond exposure (January 3)
Ned Davis Research are increasing their bond exposure to 110% of benchmark duration from 105% to get more in line with their models on market weakness. They write in this Jan 3 note that they have been reluctant to chase the market higher under thin holiday trading conditions. Nevertheless, the gap between their position and their models had gotten fairly wide. So they waited for a pullback near support under more normal trading conditions before doing so. Their Combo Model, which combines the Bond Benchmark Model (BBM) and Bond Enhancement Model (BEM), has increased to 123% of benchmark duration. The BBM has climbed to 122%, while the BEM is 129% and remains on its November 17 buy signal (See here.)
Nomura: QRA and the dovish right tail (January 10)
The current consensus for resumption of “upsized coupon issuance” in the Yellen Treasury QRA (quarterly funding announcement) is the largest catalysts behind why most believe that both bonds and equities are open to a pullback, says Charlie McElligott at Nomura. He says the right tail surprise is that the QRA yet again sees “political interventionism/activism” from the Treasury’s Yellen, and she not only again leans on more bills with less coupon than currently anticipated but then also too clearly provides guidance to markets that this is the final coupon increase moving forward. You’d likely get a reaccelerated “buy the dip”/ receive / bull flattening that could see equities rally as the end of QT is interpreted as “de facto QE” according to McElligot. Click here for the full report. Click here if you would like to speak to the analyst.
Wrightson ICAP: The QT taper debate won’t come to head until Q2 at the earliest (January 8)
QT tapering is moving higher on the FOMC’s discussion agenda but is not close to becoming an action item at this point, argue ICAP Wrightson, the money market/Treasury specialists. Judging by last week’s communications, the public debate seems likely to start out in very general and conditional terms, according to ICAP. While it’s a possibility that the shift in monthly reinvestments might not start until the second half of the year, ICAP reckon that the Fed should start to slow the pace before that, allowing it to glide into a lower level of RRP usage on a more gradual path. Even in a scenario in which the Fed’s ultimate goal was to push RRP usage down to minimal levels, there is a benefit – as Logan noted last week – in moving at a deliberate pace to gauge the market response, say ICAP. The FOMC will learn a lot about the distribution of demand for liquid Fed balances over the coming quarters, and what it learns should inform its decisions about the long-run trajectory of the portfolio. ICAP’s best guess is that the Fed will cut its Treasury redemptions in half, from $60 billion per month to $30 billion per month at the June meeting, while continuing to allow the MBS portfolio to run off for the foreseeable future. Click here for the full note.
Macro Risk Advisors: Lorie Logan and QT; Robbing Peter to pay Paul
QT is becoming a contentious issue amid tightening liquidity, according to MRA’s interpretation of Lorie Logan’s comments on tapering QT which confirm she was the driver of that discussion at the last FOMC meeting, according to Barry Knapp. He says the two primary topics of her speech work at cross purposes; on the one hand she thinks they need to slow balance sheet contraction, on the other she is concerned about the loosening of financial conditions. Which way this twists will be important for rates. While suspending QT may help liquidity, it will impair the credit channel and flatten the curve. The only offset might be the renewed issuance of coupons in the next QFA. Click here for the full report, and click here for a video of the discussion. Click here if you would like to speak to the analyst. Knapp references Joe Abate from Barclays, who he regards as an astute analyst on liquidity/QT. We highlight his latest note below.
Barclays: Bill supply and the QT pivot (January 5)
Barclays has updated its annual bill supply projections for the US money markets in light of expectations for an end to quantitative tightening (QT) in June or July. The bank expects the Federal Reserve to end QT before signs of strain emerge in money market rates and liquidity measures. It predicts that QT will end in either June or July, with the Fed then reinvesting its maturing Treasury holdings. Barclays also expects bill issuance of $400bn this year, which will keep the bill share of public debt at 21.6%. The bank suggests that the Treasury will use some of its April tax receipts to buy back debt with a maturity of less than two years. Click here for the full report. Click here if you would like to speak to the analyst.
S&P Global: Global credit outlook 2024 – new risks, new playbook (Dec 4)
The Global Credit Outlook 2024 report highlights the new risks and challenges facing the global economy and financial markets. The report emphasizes the end of the era of cheap money and the return of higher real interest rates. It discusses the impact of geopolitical risks, the need to transition to a low-carbon economy, and the risks of cyberattacks and technological disruption. The report also examines the credit outlook for different sectors, including corporates and real estate, and identifies the top global risks that could derail the baseline expectations. Overall, the report emphasizes the need for issuers and investors to adapt their playbooks to navigate the changing economic and market conditions. Click here for the full report. Click here if you would like to speak to the analyst.
Geopolitics and supply chains:
TS Lombard: Economic impact of Mid-East conflict – volatility rather than shock (January 12)
This article discusses the potential economic impact of the conflict in the Middle East, particularly in the Red Sea region. The author argues that while there may be periodic escalation and violence, a full-blown regional war is unlikely. The economic impact is expected to be more inflation volatility rather than a shock. The recent spike in container freight rates on the Shanghai to Europe route is attributed to the threat posed by Houthi militants in the Red Sea. However, the author believes that weapons resupply bottlenecks and the reactive posture of the participants will reduce the intensity of the physical threat. The article highlights the importance of considering the tangible economic and financial market impact of geopolitics, even in the absence of a generalised war. Click here for the full report. Click here if you would like to speak to the analyst.
Gavekal: The Middle Eastern kink in global supply chains (January 10)
This report discusses the escalating conflict in the Middle East following Israel’s targeted killing of Wissam al Taweel, a senior commander of the Hezbollah militia in Southern Lebanon. The assassination is expected to trigger further retaliation from Israel’s enemies, potentially disrupting global supply chains and the flow of Persian Gulf oil and gas exports. However, the report argues that the worst fears of supply chain disruption and inflationary shocks are overstated. Unlike the disruptions caused by the Covid pandemic, the current disruptions are localized and can be quantified. Additionally, consumer demand for goods in the US and Europe is soft compared to 2020, and inventories-to-sales ratios are higher, allowing companies to draw down existing inventories rather than rush to rebuild stocks. Overall, while the conflict will have negative effects on growth and inflation, they will be manageable compared to previous disruptions. Click here for the full report. Click here if you would like to speak to the analyst.
Steno Research: Suez/Panama nugget – rising troubles in both canals (January 9)
The dry bulk shipping sector has been experiencing a sharp drop in crossings at the Panama Canal due to record low water levels, leading to a larger rally in dry bulk rates towards the end of 2023. While container shipping has been largely unaffected by the lower water levels, there has been a significant drop in container tanker crossings at the beginning of the new year, along with an increase in container vessel prices for Panamax container liners. Industry contacts suggest that the troubles at the Panama Canal are a greater concern for the dry bulk shipping industry than the issues at the Suez Canal. If the troubles spill over to container ships, there could be another round of re-acceleration in goods inflation in the US. This could coincide with a weakening trend in the rent of shelter, potentially countering sticky services disinflation with rising cyclical inflation by springtime. Click here for the full report. Click here if you would like to speak to the analyst.
Steno Research: Energy cable #52; Suez troubles or a Houthi peace deal with shipping companies? (January 9)
The latest newsletter discusses the current situation in the Red Sea, with only one Russian tanker passing through the Suez Canal. This indicates the instability in the region. The newsletter also mentions the recent Houthi attacks and the potential impact on shipping. The author mentions their long position in the BOATETF and the potential impact of rumors about an agreement between shippers and the Houthi rebels. The newsletter highlights the increase in freight costs and the potential impact on commodity prices. It suggests going long on BCOM as a way to protect against increasing goods inflation. The newsletter also discusses the recent developments at the Fed and the potential for light QE, making commodity/energy investments interesting. The author notes the increase in natural gas prices due to the Suez troubles and cold weather in Europe. Finally, the newsletter introduces a demand-supply model for crude oil and discusses the dominance of the demand side in the crude oil market. It also raises the question of whether the recent turmoil in the Red Sea could lead to further disruptions in tanker transport in the future. Click here for the full report. Click here if you would like to speak to the analyst.