• Home/
  • Fixed Income

David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Draghi Says Euro-Area Turnaround Warrants Policy Dial-Back

    This article by Piotr Skolimowski for Bloomberg may be of interest to subscribers. Here is a section:

    The European Central Bank unexpectedly dropped a pledge to ramp up bond buying if the economy deteriorates, saying the turnaround in the outlook has given it to confidence to change a key part of its monetary-policy guidance.

    In what the ECB President Mario Draghi said was a unanimous decision, policy makers in Frankfurt surprised investors by ending an easing bias on quantitative easing, effectively a conditional promise to increase debt purchases in “size and/or duration” if needed. But he said downside risks remain, and added rising trade protectionism to the list of threats.

    “These are unlikely contingencies now, the ones that would suggest that we would activate this easing bias,” Draghi said Thursday. The language “was introduced in 2016 -- think about how different the situation was at that time.”

    The revision coincided with an upgrade to the ECB’s outlook for 2018. At the same time, Draghi emphasized that, currently scheduled to run at a monthly pace of 30 billion euros ($37

    billion) until at least the end of September, will continue until inflation is solidly back on track toward its goal.

    Read entire article

    Email of the day on the yield curve spread and medium-term outlook for bonds

    I just have a couple of queries for you:

    Where can I find the US yield curve spread chart (10yY-2yY) in your chart library?

    Based on expected MT to LT yield rising environment, should I keep my PIMCO income Fund (Global Investor Series Plc), or dispose of it? 

    Thank you and best regards 

    Read entire article

    Paul Tudor Jones on Jerome Powell

    Thanks to a subscriber for this note which may be of interest.

    Dogmas of the Quiet Past, Why Higher Rates are on the Horizon

    Thanks to a subscriber for this article by Pamela Rosenau which appeared in Forbes. Here is a section:

    For starters, history tells us that the dynamics of the supply and demand for money are relevant for determining an appropriate level for interest rates. The Federal Reserve is decreasing the supply of money by tapering their balance sheet, while the demand for money will increase with the latest bout of expansionary fiscal policy (i.e. tax reform). Professor Lars Oxelheim of the Financial Times, recently wrote how historical precedence has shown how this supply/demand shift can lead to significantly higher interest rates over a short period of time. Of course, this would impact the valuation of all asset classes as discount rates head higher. Market strategist Dave Rosenberg recently added that “we have a government policy that is aimed at pushing fiscal deficits higher and pulling trade deficits lower. Say this over and over again – these two goals can only co-exist with rising interest rates.”

    Also, who is going to stroll in on their white horse and be the new big US treasury bond buyer? We know that the Fed is pruning their bond portfolio. After all, newly installed Fed Chairman Powell showed his true colors six years ago when he warned of the “Greenspan put” and its implicit encouragement of risk taking. Considering his concerns back then, I cannot imagine him being overly dovish given the valuation excesses in our environment today. Furthermore, the Chinese could play monetary hardball as a response to any hostile U.S. trade actions and choose to mitigate their participation in our auctions, thus causing a sudden spike or pernicious reset in interest rates. Frankly, Xi Jinping has a license to do whatever he wants at this point.

    Read entire article

    Why Italian Elections Matter: A New Type of Populism Is Rising

    This article by Giovanni Legorano for the Wall Street Journal may be of interest to subscribers. Here is a section:

    The election is likely to prompt a question that could force 5 Star to define its future—and potentially that of Italy, too. Is it a governing force or simply a protest movement?

    On one side are members, including Luigi Di Maio, the party’s 31-year-old candidate for premier, who are pushing it to join an alliance with mainstream parties. According to polls, 5 Star would receive about 27% of votes—not enough to govern alone, but potentially enough to play a major part in a coalition government.

    Mr. Grillo has roundly rejected that scenario, saying that unless 5 Star wins an outright majority, it should remain an opposition party. Joining a coalition government is “like saying that a panda can eat raw meat,” he said in January. “We only eat bamboo.”

    If no single party or coalition emerges with a parliamentary majority, Italy’s president could ask parties to attempt to form a grand, cross-party coalition that could have a limited lifespan.

    Read entire article

    Email of the day on lead indicators

    The Poison We Pick

    This article by Andrew Sullivan for the New Yorker offers a particularly lucid account of the opioid epidemic in the USA. Here is a section: 

    One of the more vivid images that Americans have of drug abuse is of a rat in a cage, tapping a cocaine-infused water bottle again and again until the rodent expires. Years later, as recounted in Johann Hari’s epic history of the drug war, Chasing the Scream, a curious scientist replicated the experiment. But this time he added a control group. In one cage sat a rat and a water dispenser serving diluted morphine. In another cage, with another rat and an identical dispenser, he added something else: wheels to run in, colored balls to play with, lots of food to eat, and other rats for the junkie rodent to play or have sex with. Call it rat park. And the rats in rat park consumed just one-fifth of the morphine water of the rat in the cage. One reason for pathological addiction, it turns out, is the environment. If you were trapped in solitary confinement, with only morphine to pass the time, you’d die of your addiction pretty swiftly too. Take away the stimulus of community and all the oxytocin it naturally generates, and an artificial variety of the substance becomes much more compelling.

    One way of thinking of postindustrial America is to imagine it as a former rat park, slowly converting into a rat cage. Market capitalism and revolutionary technology in the past couple of decades have transformed our economic and cultural reality, most intensely for those without college degrees. The dignity that many working-class men retained by providing for their families through physical labor has been greatly reduced by automation. Stable family life has collapsed, and the number of children without two parents in the home has risen among the white working and middle classes. The internet has ravaged local retail stores, flattening the uniqueness of many communities. Smartphones have eviscerated those moments of oxytocin-friendly actual human interaction. Meaning — once effortlessly provided by a more unified and often religious culture shared, at least nominally, by others — is harder to find, and the proportion of Americans who identify as “nones,” with no religious affiliation, has risen to record levels. Even as we near peak employment and record-high median household income, a sense of permanent economic insecurity and spiritual emptiness has become widespread. Some of that emptiness was once assuaged by a constantly rising standard of living, generation to generation. But that has now evaporated for most Americans.

    Read entire article

    Will Quantitative Tightening (QT), which is deflationary in theory, be inflationary in practice?

    Thanks to a subscriber for this article by Viril's Sokolof for 13d.com which may be of interest. Here is a section: 

    It is equally noteworthy that most of the peaks in M2 velocity shown in the prior chart, with a couple of exceptions, occurred when the U.S. dollar was in protracted bear markets from 1972 to 1980, 1985 to 1995 and 2002 to 2008. Moreover, the first and third of those down-cycles was marked by generally-rising yields on 10-year U.S. Treasuries. In other words, one could argue that rising UST yields were a symptom of capital flowing out of the dollar, which contributed to a higher cost-of-money and higher inflation.

    These relationships shed some insight into the idea that tighter monetary policy — reflected in the slowing growth rate of M2 and the onset of the Fed’s balance-sheet reduction — is likely to be inflationary in practice. When money supply growth slows and the demand for funds increases — such as with the $1 trillion-plus fiscal deficits we wrote about last week — the conditions are ripe for an inflationary surge and a falling dollar. One could also argue that this will be good for real assets (which were hurt by QE during 2010 to 2016) but bad for financial assets (which benefited from QE).

    Read entire article

    Email of the day on the potential for downtrends

    Your recent assessments of the markets appear to be that a period of ranging is likely to be followed by markets going up again. Of course, whilst no one knows what the future will be, I wonder why you don't see the greater likelihood of markets turning down after some consolidation. With the amount of US debt increasing, interest rates increasing, and stock market levels already high by historical standards, are you not more concerned that markets, being forwards looking, might be more likely to head down than up? Esp. since markets struggle when interest rates go above 3%? I appreciate your talk of share rotation, but a rising tide lifts all boats and surely the opposite is true when markets tank?

    Read entire article

    Email of the day on stagflation

    I have been a long-time subscriber and attended the Chart Seminar around ten years ago. Back then you were a young kid and David led the show. Showing no disrespect for David who admire greatly, you have become at least an equal when it comes to your daily audios. I found this weekend's long-term picture very interesting and well done. I think you have properly described where we are at presently and the likely outcomes in the medium and longer terms. I do get the sense over here in the US that we may be facing an environment of Stagflation. With rising inflation and what now looks like slower growth in the near term, combined with a shrinking Fed balance sheet and rising rates, we could be facing some real headwinds for equities. Can you share your insights on an environment of stagflation and what asset classes would generally over-perform and underperform if the past is a guide? Thank you and keep up the great work!

    Read entire article