Bond market update: deep drawdowns, broken models, real yields, Japanese, Chinese, Fed policy, macro risks, economist forecasts, and long-term mean reversion...
One comment. 40 years of bull market for bonds (yes there were a few hiccups and also for equities) seems to have come to an end. While bond shorts are at extreme and we may get a short term correction, I somehow doubt we stay at the average for too long. Usually when the pendulum swings back, it doesn’t stop at the mid point.
Hmm good point, maybe the cyclical bull/bear moves for treasuries going forward will be in the context of a new uptrend instead of downtrend (or neither... just a new higher range)
i think though for bond yields to sustain a longer-term uptrend the thematics are going to need to do a lot of heavy lifting (e.g. infrastructure and energy transition investment, reshoring, commodity super cycle, geopolitics/space) -- maybe that's enough, alongside the inability of govt to reign in fiscal...
Great nuggets as usual. That last point on us reframing away from higher for longer to accepting that this might just be us getting back to normal is not to be underestimated. Kind of makes me wonder (and scary thought at that) of what happens when something eventually breaks and the Fed Put is gone for real. I don’t think people are taking risks with that as part of the possible scenarios.
Indeed. I think for the current levels to become new normal you need to delete the cycle (no recessions, or only very mild) and/or the structural themes do more heavy lifting (infra, energy investment, reshoring, etc etc), and/or somehow nominal growth stays high (e.g. from tight commodity supply, tight labor supply)
Great set of charts. Thanks.
One comment. 40 years of bull market for bonds (yes there were a few hiccups and also for equities) seems to have come to an end. While bond shorts are at extreme and we may get a short term correction, I somehow doubt we stay at the average for too long. Usually when the pendulum swings back, it doesn’t stop at the mid point.
Hmm good point, maybe the cyclical bull/bear moves for treasuries going forward will be in the context of a new uptrend instead of downtrend (or neither... just a new higher range)
i think though for bond yields to sustain a longer-term uptrend the thematics are going to need to do a lot of heavy lifting (e.g. infrastructure and energy transition investment, reshoring, commodity super cycle, geopolitics/space) -- maybe that's enough, alongside the inability of govt to reign in fiscal...
Great nuggets as usual. That last point on us reframing away from higher for longer to accepting that this might just be us getting back to normal is not to be underestimated. Kind of makes me wonder (and scary thought at that) of what happens when something eventually breaks and the Fed Put is gone for real. I don’t think people are taking risks with that as part of the possible scenarios.
Indeed. I think for the current levels to become new normal you need to delete the cycle (no recessions, or only very mild) and/or the structural themes do more heavy lifting (infra, energy investment, reshoring, etc etc), and/or somehow nominal growth stays high (e.g. from tight commodity supply, tight labor supply)
Great issue, thanks for sharing your work
Cheers, thanks for saying!
Thanks for the hat tip!
Such a good edition, had to share it.
Awesome, thanks -- appreciate your help in spreading the word!