And if the bond market is ugly, everyone else suffers.
🧵
2/15
First, let's remember how this year started.
On December 18, 2023, BofA published its December 2023 Global Fund Manager Survey.
This graphic shows that these managers were the most bullish on rates since they started asking the question 20 years ago (2003).
3/15
Global fund managers agreed that 2024 would be the best time to be long-duration (lower rates) in the last 2 decades.
They were more bullish on rates now than on the 2008 financial crisis or the 2020 global economy shutdown (both were massive gains, if long-duration).
4/15
How's it going? Bad!
Through April 15, the Bloomberg Domestic Agg Index YTD total return is -3.11% (blue)
This is the 49th year of data (1976). Only 1980, 1994, and 2022 were worse through April 15.
All those years were historically bad years.
Not good
5/15
Since it was a survey of GLOBAL managers, how is the Bloomberg GLOBAL Agg index doing? Also, bad!
YTD, it is down -4.25% (blue line)
This index started in 1990 (35 years ago). Only 2022 was worse; that was the worst year in the bond market since the Civil War (1865)!
6/15
And here is the 30-year Treasury Total Return.
YTD, it is down 9.80% (blue line).
The data starts in 1977, so 48 years of data. Only 2009, 2021, and 2022 were worse YTD through April 15.
Long TLT has been a horror show.
7/15
If these global fund managers had a meeting in December to position to LOSE AS MUCH MONEY AS POSSIBLE, how would it differ from what they have done YTD?
Why so bad? Because of their assumptions, they have been way off the mark.
9/15
They overwhelmingly thought the economy would have a soft landing.
As I like to say, "This was never the case."
10/15
They were also 90% sure inflation would fall in 2024 leading to an equally high conviction that central banks (the Fed) would cut rates.
How does that look now on April 15!!
11/15
So, when does this bond sell-off stop?
To put it bluntly, saying "soft landing," "last mile to 2%," and "the Fed will cut three times in 2024" becomes embarrassing in public.
12/15
When we get to this point, it will signal that all the positioning for these outcomes, which is killing their performance YTD, has become too painful and has been reversed.
13/15
Interestingly, as I'm writing these posts, I have Bloomberg TV on in the background, and they have fund managers from organizations that manage trillions in assets, still talking about a "soft landing" and "last mile to 2%" and "three rate cuts in 2024."
14/15
So, we are not there yet.
Global Fund managers still think reading from their 2024 outlooks published in January is a good idea.
They have yet to figure out that these are the roadmaps that got them into trouble in the first place.
15/15
Final thought, when do higher rates "bother" the stock market?
When the 10-year hits 4.50%. Or starting last week.
See below ... the S&P 500 close today (April 15) was its lowest close since February 20.
Here is the correct chart.
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Yesterday, I made the case that tariff-driven inflation expectations are soaring, driving the bond market, and paralyzing the Fed from cutting despite fears of a recession.
Last week, the 30-year yield rose 46 basis points last week to end at 4.87%.
As this chart shows, this was its biggest weekly rise since April 1987 (38 years ago!).
2/16
Why Did This Happen?
Let's start with what it was not. It was not data that suggested the economy was strong or recent inflation was high.
Here is a tick chart of the last 3-days of the 10-year yield.
3/16
The better-than-expected CPI and PPI reports (green) had no impact on the 10-year yield.
The worst-than-expected Michigan Survey (red), with its collapse in sentiment implying a severe slowdown or recession, did nothing to stop the drive in yields to the highs of the day.
How stressed are markets? By this metric, the most in 17 years.
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SPY = The S&P 500 Index Trust. This was the first ETF created in 1993 and is one of the largest at $575 billion.
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The middle panel is SPY's Net Asset Value (NAV). The price closed at a 90-basis-point premium to the underlying value of the assets.
The last time anything like this happened was 2008. To emphasize, not even in the crazy days of 2020 did its divergence get this big.
2/4
VOO = Vanguard S&P 500, $566 billion in assets
At the same time VOO, which is Vanguard's version of SPY, went out at one of its biggest discounts in years (middle panel).
3/4
Finally, IVV iShares Core S&P 500 ETF, $559 billion in assets
It has been trading at a persistent discount for a few weeks (middle panel).
Something has broken tonight in the bond market. We are seeing a disorderly liquidation.
If I had to GUESS, the basis trade is in full unwind.
Since Friday's close to now ... the 30-year yield is up 56 bps, in three trading days.
The last time this yield rose this much in 3 days (close to close) was January 7, 1982, when the yield was 14%.
This kind of historic move is caused by a forced liquidation, not human managers make decisions about the outlook for rates at midnight ET.
It keeps going, the 30-year yield is now 5.00%!
As chart shows, since Sunday Night, 54 hours ago, the 30-year is up 67 basis points. Cannot find a move like this in my database.
The only overlay is the 30-year Gily blowing up during the Liz Truss moment" in September 2022. That was 130 bos in 5 days. We are now 67 bps 2 1/2 days.
S&P futures are down another 100 points or 2% tonight as I write. This sell-off might not be about tariffs but on the realization that the bond market is broken/breaking.
Markets are fragile. Tariffs broke the bond market and now this decline is about this realization.
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A liquation is underway and must be completed, losing positions have to be exited, not supported or ignored.
Cutting rates and making financing rates cheaper in the middle of this kind of liquidation, encourages speculation ... exactly what is not needed in the middle of such a move.
I think the market knows this which is why the chart below shows only a 63% probability of a cut in rates in a month. Not intra-meeting! Rates cuts are not the answer.
The Fed restarting QE to artificially raise bond prices will only cement the belief that a massive spike in inflation is coming.
This is not a problem that can be fixed with "printing." It was years of "printing" that encouraged the massive build-up in speculation that is now being forced to liquidate.
You cannot drink yourself sober. You can encourage speculation by cutting rates/WE to stop a speculative unwind.