It's never easy when bonds and stocks decline at the same time, but despite the much-publicised death of the "risk parity" strategy, I don't think the past few weeks' price action qualifies as decisive evidence. After all, the S&P 500 is down a mere 0.6% from its peak in the beginning of June, while US 10-year futures are off only 1.5%. In writing this, though, I remember that many punters in this business use leverage. This acts as an accelerant not only for the volatility of their PnLs, but also for the speed with which a meme can take hold in the peanut gallery. I sympathise with the plight of bond traders in Europe where the dislocation in yields has been particularly nasty. When yields are near zero, or even negative, the relationship between small changes in yield and prices can be brutal. This is even acuter in Japan, where the BOJ might soon have to actually defend that 0% target on the 10-year yield, to avoid an accident in the domestic asset management industry. In the U.S., the 10-year yields has been altogether less dramatic, but big enough to raise questions about whether we have made a switch from a flattener to a steepener.
Read MoreThe second quarter finished with a tricky question for markets. Did last week’s price action signal a significant change in tune or was it just insignificant noise in an unchanged trend of lower global long-term interest rates? One the one hand, it’s tempting for me to run a victory lap. Here I was musing about a steeper U.S. yield curve and outperformance in financials and energy. On that background the most recent price action has been a slam-dunk. On the other hand, I also said that I thought yields would fall over the summer, and that the reflation trade wouldn’t re-rear its head until Q3. So perhaps I shouldn’t raise my arms in celebration just yet.
Read MoreIt's official; everyone is now musing about the risk of a Fed "policy mistake" in light of the steadily flattening yield curve in the U.S. I have mused incessantly about this topic in recent weeks, so I will spare you the gory details of my view. It seems clear, though, that if markets were willing to offer the FOMC a rate hike in June for free, they are not going to roll over in September, let alone play along with a potentially fourth hike in December. In other words; the Fed is now on the spot. A swoon in risk assets over the summer—it has been known to happen—coupled with a further decline in long term bond yields would set up an interesting end of the year for the Federales. I am sympathetic to idea of one last deep dive in long-term bond yields to cement the fate of the late-comers to this rally. After all, we can't really talk about a policy mistake at the Fed before we are staring down the barrel of an inversion.
Read MoreWe have had the first proper summer days in the north east of England this weekend, and they've been delivered just in time for the Hoppings. For those uninitiated in the folklore of Newcastle living, it does not get much better than that. It is tempting to extrapolate this state of affairs to the coming months, and hope for a warm summer lull. But experience suggests that would be complacent. Rain is forecast for next week. We should enjoy it while it lasts.
In markets, last week offered up another pinch of curve flattening across the pond. The Fed raised rates, as expected, and also signalled one more hike this year. The hawkish bias surprised some punters which had been looking for the Fed to climb down in light of recent underwhelming inflation prints. As far as I can see, though, the Fed didn't really veer off course. Central banks are like super tankers; they move slowly and persistently. The FOMC reiterated that it is in a three-hikes-a-year mode and that it continues to expect the labour market to tighten. If this is a traditional cycle, the Fed will stay the course until something breaks somewhere.
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