Recap 1-23-14: A Casual Hypothesis

Commentary:

On thing that seems clear is that over the past 6 months, the market has loved a 3.9% yield on 30y treasuries. The chart below shows the 30y yield in orange, the 3.9% level in green, and the 5s30s yield curve in white. As the chart shows, each time the 30y has printed 3.9% has coincided with a flurry of bond buying that has flattened the curve.

Who is doing the buying? Well we know that insurance companies and pension funds (real money entities with long duration liabilities) tend to be fairly active in this space, and furthermore they usually do asset switches. With respect to buying 30y bonds, the asset they usually switch out of is stocks. Over the past year, the relationship between the 5s30s yield curve and SPX has been fairly tight – a relationship that didn’t seem to exist prior to 2012. In particular, note that periods of equity market corrections have coincided well with 5s30s yield curve flattening:

Now, of course it’s not clear whether this is a relationship that will last, and whether the explanation for the relationship is accurate. But if it is on both counts, with the curve at the lower end of the range, perhaps recent equity market price action is due to change.

Separately, if you’re not already aware, several EM currencies are in the process of breaking down:

Notable:

  • PMI:
  1. China HSBC Flash Mfg PMI declined to 49.6 vs 50.3 exp and 50.5 prev
  2. EU Mfg PMI jumped to 53.9 vs 53 exp and 52.7 prev
  3. Germany jumped to 56.3 vs 54.6 exp and 54.3 prev
  4. France jumped to 48.8 vs 47.5 exp and 47 prev

  5. EU Services PMI improved to 51.9 vs 51.4 exp and 51 prev
  6. US Markit PMI declined to 53.7 vs 55 exp and 54.4 prev

US Jobless Claims was stable at 326k vs 330k exp

Canada Retail Sales ex Autos was stable at 0.4% MoM vs 0.3% exp

EU Consumer Confidence improved to -11.7 vs -13 exp and -13.6 prev

Dealbook: Abe seems pretty pleased with himself

Upcoming Data:

  • Fri: Carney Speaks, Canada CPI
  • Weekend: Draghi, Carney, and Kuroda speak at Davos, Japan Trade Balance, BoJ minutes
  • Mon: German IFO, US New Home Sales, South KoreaMfg Survey, Australia NAB Business Confidence
  • Tue: France Consumer Confidence, Italy Cons. Conf, US Durable Goods Orders, US Consumer Confidence
  • Wed: EU Money Supply, Carney Speaks, FOMC
  • Thu: GermanyCPI, US Jobless Claims, Pending Home Sales, Japan PMI, CPI
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2 thoughts on “Recap 1-23-14: A Casual Hypothesis

  1. you seem very right on this. MS’ QDS team had a nice research note on the difference between overnight and trading-day SPX performance (with the underlying assumption being that real money is only active during the trading day session).

    There’s more anecdotal evidence of a big real-money allocation trade going on, with corporate’s plans hitting 97% funded all of a sudden, they probably want to lock some gains in.

    http://www.bloomberg.com/news/2014-01-13/bonds-captivate-16-trillion-of-pensions-seen-unloading-equities.html

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