A thread explaining why the bond market is asleep and what wakes it up.
---
The next chart shows the MOVE Index (Merrill Options Volatility Estimate). It is the “VIX of the bond market” and is near its lowest reading in history (which was set on July 30).
(1/10)
Should interest rates be this low? Consider these 2 charts.
The bond market often moves in tandem with commodities. But as the boxes show, that has not been the case recently.
Commodities are suggesting interest rates should be moving higher, but they are not.
(2/10)
* Top panel shows the SPX (log)
* Orange bars show the VIX’s close on days the SPX hit an all-time high (ATH).
VIX hit 26.57 when the SPX hit an all-time high on Sep-2. The VIX has never been higher with SPX at ATH.
Stocks are not exhibiting low levels of volatility.
(3/10)
Foreign exchange volatility hit a new low BEFORE the pandemic. But currency volatility has been on the rise lately and well off the pre-pandemic low.
No other markets are have low volatility levels like the bond markets.
(4/10)
So why is the bond market asleep?
The Fed, via Quantitative Easing (QE), has bought over $3.1 trillion of bonds since mid-March (bottom panel).
(5/10)
These purchases have rocketed the Fed’s holdings of fixed income securities to $6.3 trillion.
(6/10)
In a Nov 2010 Washington Post op-ed, Ben Bernanke explained the purpose of QE:
Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corp bond rates ...
(7/10)
... will encourage investment. And higher stocks will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
(8/10)
By buying massive amounts of bonds, the Fed is suppressing interest rates and encouraging investors to seek riskier investments. And by signaling that they “have investors’ backs” they are promoting speculation (as can be seen in the options market lately).
(9/10)
We argue a significant rise in rates would be a big negative for all markets.
What would causes this rise? Inflation. The one thing bigger than the Fed is the collective of the bond mkt. Inflation returning chases bond investors out faster than the Fed can "print."
(10/10)
• • •
Missing some Tweet in this thread? You can try to
force a refresh
The deficit as a % of GDP (bottom), now 5.93%, is higher than in any period except the Great Recession (2007 - 2009) and the 2020 COVID shutdown (dotted line).
The government is borrowing to spend money like the economy is trying to recover from a recession.
2/6
This separates Federal revenues (orange) and spending (blue).
The difference is the deficit (middle panel).
The bottom panel (black) shows that taxes only cover 73% of federal spending. The other 27% has to be borrowed.
3/6
Yearly federal spending is $6.24 trillion or 22.3% of the US economy (or nominal GDP).
Like the deficit chart above, the only time the government has spent this much as a % of GDP is when trying to get the economy out of a recession.
The 13Fs are a disappointment. Very little wealth manager adoption so far (like 1%).
Unrealized gains are shrinking fast.
Why I've been skeptical of Spot BTC ETFs.
2/7
* March 11 = only $1B inflow day.
* March 12 = Brokerage report saying $220B of inflows over the next 3 years (effectively predicting constant inflows, forever).
* March 13, all-time high close (5PM ET price)
Since the mid-March frenzy, inflows peaked (top panel).
3/7
The 3/31 13Fs are coming out, and they are disappointing for those who thought a big boomer wave of buying BTC ETFs through wealth managers was underway. Only odd lots.
IBIT has only 27 13Fs with more than 10,000 IBIT shares (~$360k), way less than 1% of outstanding shares.
Economists’ median estimate for tomorrow’s payroll release is 215k. Estimates range from 150k to 250k.
Note that February was initially reported as 275k. So, every one of the 61 forecasts has payrolls declining from last month.
2/5
Since the beginning of 2022, economists have often underestimated the actual payroll release.
During these 26 months, economists underestimated payrolls 22 times.
3/5
The BLS surveys 120k "establishments" employing about one-third of the US labor force.
Lately, the survey’s response rate has been falling and becoming an issue.
The February payroll report’s initial response rate was 66.9% (blue line), which is higher than January's 56% (and December's 49%) but remains low compared to past decades.
As the red and purple lines show, the BLS follows up in the ensuing months to get the missing responses. But even these are falling.