Expertise Asia has posted almost 1,000 articles over the past 5 years. Interested readers have the option to contribute to the publication, as an acknowledgment of the value provided to them. Contributions do not commit the author to future production. Thank you for your continued support.

Back to archive

Share

Twitter Linkedin Facebook

Short-term sensationalism

It’s hardly been a week that Bill Gross declared the Treasury market to be history. The shorts he claimed to have put on haven’t performed much as yet. The rest of the world is still waiting for the break-out in yields and the new course set to reach 2.80% by year-end. If you think about it, it is actually ludicrous to make such a call. 10-year rates are at 2.59% currently, and Gross seems to be moving heaven and earth for a mere 20bp…

Anyway, let Gross be Gross, and the other pundits be pundits. One would have assumed that their analysis went beyond looking at some charts and finding pattern-changing price movements. Oh well, I forgot Gross’ breathless comment on evidence he has that China is liquidating Treasuries. Last I looked they still held almost 1.2 trillion. It is actually what China should do, to use the funds to finally prop up their gold reserves to a level commensurate with the growing size of their economy.
But it won’t happen because Bill says so. Meanwhile, the yield curve has resorted to flattening again. The 2/30 year differential hit a new 10-year low at 80bp overnight before settling at a 81 handle. Remember, those readings were at 350bp in 2014, and 400bp in 2011. The trend is your friend, and it is very likely that the curve will be even flatter in 2018, if not slipping into an inverted state. Last time we could observe a curve inversion was in 2006/07, just before the financial crisis commenced.
History doesn’t repeat itself, but it rhymes. There is a reason why we have these massive shifts in the curve, and it doesn’t bode well. They have traditionally been a harbinger of economic weakness or even a recessionary environment. They are also a testament of inflationary expectations to be excessive. And to believe that the bond market will fall out of bed is nonsense considering the overwhelming real money demand recently, especially in the long end.
Maybe Gross thinks he can pull another Bund stunt again. You might remember, a bearish call of his on German government bonds in 2015 caused a massive short-term spike in the 10-year yield, by close to 100bp. He and other punters must have been rubbing their hands. The shock subsided quickly again, and German yields hit new lows only 6 months later, but Gross would have long closed his positions and laughed all the way to the bank.
How can one seriously listen to people who adopt this kind of market communication and behaviour? They benefit from short-lived sensationalism, not from deep-rooted conviction on the generational change of a market. Even if we had some volatility in the near future, we now know that Gross will cover his shorts at 2.80%. So, where is the big call in a punt like that? The entire investing world has gone mad over his vanity, while he is waiting to lock in a 20bp blip.
Ignore such humbug, I say. Rather, see through that volatility and keep your eye on that flattening curve!
Back to archive

Share

Twitter Linkedin Facebook

The postings on this website are confidential and private. The material is provided to you solely for informational purposes and as a complimentary service for your convenience, and is believed to be accurate, but is not guaranteed or warranted by the author. It has not been reviewed, approved or endorsed by any financial institution or regulatory authority in your jurisdiction. It should not in any way be construed as investment advice and/or -recommendation of any kind, in any market and in any jurisdiction. The views expressed therein are none other than the author’s personal views. He is not responsible for any potential damages or losses arising from any use of this information. The reader agrees to these terms.