Interest rates – Starting to Move

Published on: January 14th, 2018

Inflation expectations are marching higher again and global rates are moving as a result. Europe is the most mispriced and the ECB now has a lot of responsibility on its shoulders.


  • CL
    Chris L.
    15 January 2018 @ 15:48
    Hi Julian, What effect do you see rising european rates having on US tech stocks and the broader Nasdaq? Is the weak dollar all out bullish for this space?
    • JB
      Julian B. | Contributor
      30 January 2018 @ 19:28
      I think rising European rates are a key driver of US Treasuries (its been European/Japanese flows into the US market that have supressed US yields). As US yields rise I expect rate sensitive sectors like the Nasdaq to get hurt badly. These are "Growth" stocks i.e. they do well when there is no growth . Higher yields implies higher growth. As for $ ...yes in theory a weak $ is good for tech...BUT I'm not playing a weak $. I think we have a risk-off $ bounce coming ie stocks lower and $ up
  • JJ
    Josh J.
    15 January 2018 @ 18:22
    Hi Julian and RV team, What time horizon do you see for the Short TLT or Long TBT setup? For 1 month or 1Q 2018 (3 months) or for 1H 2018 (6 months)? Thanks.
    • JB
      Julian B. | Contributor
      30 January 2018 @ 19:25
      The game is on now...If you are looking at options I wouldn't bother just look at the levels we've given and trade vs those. If you want to buy options Dec 2018 50 strike puts on EEM look cheap
  • SR
    Steve R.
    16 January 2018 @ 03:15
    The risk here with US bonds is when we get a sizeable market correction, which feels like its imminent to me (IMHO). In such a case wouldn't there be a huge 'flight to safety' to US bonds? The market is very fickle and I could image a sudden rush to bonds in the event of an equity retreat - at just about the same time as everyone is loading up (shorting US bonds) due to the discussed inflation theme? So what would be the best way to hedge out this risk?
    • JB
      Julian B. | Contributor
      30 January 2018 @ 19:23
      Steve as you know I'm a bear and I share your concern. BUT its an issue of timing. At least initially both bonds and stocks can both fall (this is the positive correlation between stock and bond PRICES not yields we've discussed). Indeed, in the Taper Tantrum in 2013, the Bund collapse on Q2 2015 and the bond sell off in 2016 correlations went positive i.e. bonds and stocks both fell in value. Yes at some point when equities have fallen enough that policy makers panic and ease then yes bonds bounce. But at least initially that isn't a risk. Frankly, the hedge initially is selling both.
  • TH
    Thomas H.
    16 January 2018 @ 13:06
    The question is how unwinding QE will affect asset prices. I do not see how this is bullish for the economy. Failure to raise rates or stop QE is inflationary. The real macroeconomics question is whether debt will be inflated or defaulted.
    • JB
      Julian B. | Contributor
      30 January 2018 @ 19:18
      Thomas I addressed this in a RV interview but I think that section was cut. Some debt will be inflated, especially government obligations. It's that simple and we have no choice. However, outside the official sector the outcome will depend on whether the entity with the debt has pricing power or not. Imagine 2 firms; Firm A and B both junk with loads of debt but very different abilities to pass on price increases. As rates rise in nominal terms (not necessarily real terms) Firm A can hike prices, thus service it's debt despite the higher cost and as the value of that debt is eroded the stock explodes higher. Firm B on the other hand, has no pricing power and as its debt servicing costs increase it defaults over.
  • JJ
    Josh J.
    17 January 2018 @ 04:41
    Hey RV guys, Can you take some q's from folks? Cuz by the time we get your response, its usually too late.
  • MG
    Miguel G.
    17 January 2018 @ 17:07
    I couldn't agree with you more Julian only concern I have is how long this move is taking to take shape. I look at US macro and the data is pointing to the economy slowing down in Q3 in rate of change terms. If im correct on this then this yield spike needs to happen no later than summer or Im afraid that a tipping point in US growth will once again put a lid on yields. IMHO I think time is of the essence and if this is in fact going to happen it needs to start happening soon. FWIW I am long TBT around 34 with hopes of it becoming a nice size swing trade by summer.
  • AC
    Andrew C.
    18 January 2018 @ 06:13
    What happens to European banks if rates in Europe increase? One would think they become more profitable and thus long UBS/DBK/CSG/ING might be a good way to play this. What do you think, Julian?
    • JB
      Julian B. | Contributor
      30 January 2018 @ 19:11
      Hi Andrew yes I like European banks with a slight BUT. If rates rise too quickly as was the case in Q2 2015 and is once again a risk you have to be careful how you structure the trade. Yes banks will rise on a relative basis and outperform the broad market. BUT they could still fall overall as the overall index is hit by rising yields.
  • AC
    Andrew C.
    18 January 2018 @ 06:18
    Also, rates have been rising in the US for several years. Your chart shows the 10yr bottomed in 2016. So for the past 18-24months, the market has been "on a tear" even though rates are rising. Why might this change now?
  • DB
    David B.
    20 January 2018 @ 08:46
    Raoul and Julian- Please provide an update in chart format for the trade ideas you've made. I recall Raoul being long the US dollar and short crude oil. The US dollar has fallen and crude oil has risen. Perhaps there are other recommendations, but I do not recall except possible gold and EEM. The TLT trade idea is interesting. Have you considered the COT futures data for both T Bonds and 10 Year T Notes? Commercial traders are net short T Bonds yet net long 10 Year T Notes. Thank you, David