Less Doom & Gloom?

Published on: September 14th, 2019

Over the summer, markets were faced with an almost never-ending list of adverse developments. The result was a strong trend in anything related to the “race to the bottom” in global rates. We believe that narrative is now vulnerable.


  • JQ
    JACK Q.
    15 September 2019 @ 08:58
    Julian - how much of a fixed income correction do you reckon we see? EDZ0s already had a 50bps pullback from the highs, possible for another 50bp+ here?
  • GP
    Geoff P.
    15 September 2019 @ 11:45
    Did the ECB spark a rate trade unwind that would affect these positions by allowing a portion of the reserves to be held at the ECB at 0% vs buying bunds at negative? It seems as if the trade started to unwind a bit before the ECB but that could have been profit taking in advance of the meeting. It sure seemed to be exacerbated after the ECB.
  • KA
    Kelly A.
    15 September 2019 @ 20:45
    Excellent. Thank you.
  • CH
    Corey H.
    16 September 2019 @ 00:42
    Great read. It seems the geopolitical developments / exogenous shock risk is ever present. Curious how you see the middle east oil strike in some form impact your analysis?
  • B
    Brandon .
    16 September 2019 @ 16:52
    probability that EDZ0 trades to 98.00 ?
  • AM
    Artur M.
    16 September 2019 @ 18:10
    Thanks Julian, I would like to mention here CFTC NON Commercial Net Positioning. Name, 1y z-score, 3y z-score UST10Y, -0.55z, -091z UST2Y,064z, -0.28z UST5Y, 0.62z, 0.99z UST Bonds, -0.35z, -1.11z Eurodollar, 1.69z, 2.77z Everything under 1 is not so extended on longer time frames, below 0 need to add to positions. So UST looks far from extended. Eurodollars are close to 3 sigma (z score) which I can agree is not looking good on 3 year basis when looking at positions. Imo the reversal is purely technical and to some extent short term cyclical, see TLTs in August-September last years. At the same time econ data is just starting to look bad. (all comparisons to consensus is just BS) And rates corrected a lot while GC (Gold) just holds positions. The only worry that I see for EDZ9 positions (that somebody mentioned here), is founding issue as EDZ9 / EDZ0 contracts are heavily shorted against EDH contracts ) These contracts have a spread of today 40 bps to FF. But this could resolve itself like in 2000 and we could go higher quickly. but this is speculation and an other story.) I know that CTAs are not non commercials but if we just have a correction here, CTA will be adding again. Just wanted to share my observations Thanks for your update and views //Artur @Ar2go2
    • GP
      Geoff P.
      16 September 2019 @ 20:40
      Thanks for posting the z-scores Artur. I'm curious about the ostensible over positioning in ED. Perhaps a 1 or 3 yr z-score is less comparable to interest bearing Ts during a zero rate environment. That is, one might expect speculative positioning in ED to be short bias with FF at zero going into the first rate hike cycle in over a decade. Certainly with the first rate cut cycle since 08, the swing to long might be dramatic. I'd be curious to comp ED z-scores from other rate cut cycles with net specs as a percent of OI. Just a thought. Still very eye opening stat. Thanks.
  • LJ
    Lucille J.
    16 September 2019 @ 21:09
    Just once I would like and honest commentary low interest + buyback + defict + federal reserve intervention = bull market (ponzi scheme)
  • JK
    James K.
    16 September 2019 @ 21:47
    Agree with analysis...have “sensed” the Macro changes also ...but.. Devils Advocate - “what if” all those chart reversals are actually flag or reverse flag formations .... ?
  • SS
    Shanthi S.
    17 September 2019 @ 02:48
    Great stuff. Thank you very much.
  • wj
    wiktor j.
    19 September 2019 @ 13:38
    Good stuff. Do you guys know what the Fed bought in the repo market? Was it us debt or CLO'S? I find it relatively close to some companies having downgraded thier debt that there is a problem in repo.
    • GP
      Geoff P.
      20 September 2019 @ 16:40
      They just added 2 week term REPOs to the daily REPOs. When do they chuck it and just go QE4? Saw a good chart showing a combo of growth and QT putting excess reserves at pre-QE3 levels. Very interesting. DX at the top end of the recent consolidation after an inside day yesterday.
    • GP
      Geoff P.
      20 September 2019 @ 11:33
      I believe it was an over abundance of shorter term USTs on dealers books. These REPO transactions are not QE like bsheet expansion. They get unwound the following day. They may get reinitiated, but it's a constant daily unwind. The collateral is all USTs (not an LEH situation).
  • MS
    Michael S.
    19 September 2019 @ 17:03
    Need some help. Is there a chance for major distortions to arise in Euro Dollar or Libor mkts. meaning, I'm leveraged to take advantage of ease, and they turn against me due to the crazy stuff going on in the dollar shortage dynamics ? Right now, I'm pretty plain vanilla. Long T-Bonds and adding back to Gold. Also, using Libor product ETF. Go easy on me, these seem like naive questions but... Thanks.
  • MG
    Miguel G.
    20 September 2019 @ 13:45
    Nice work Julian but your conclusion got me a tad confused on your outlook from here. You make a compelling case of why yields could continue to move higher from here but then in your conclusion you state that it may just be a "episode" rather than a "trend change". So would it be fair to characterize your outlook as being constructive to higher yields for now but will need to see more of this picture develop before you're ready to fully commit to the view that we are in the midst of a trend change? Thanks
    • ag
      anthony g.
      26 September 2019 @ 18:09
      Agreed - which is it ?