What are Chinese Bond Yields Saying?
Bond risk moving higher, Bitcoin Weekly Death Cross
Ok guys, we don’t do it very often, but we have to talk about foreign bonds for a minute. In particular here is a chart of the Chinese 10yr note:
What is going on here? Is the PBOC actively managing this yield decline? How bad is the Chinese economy truly? What these bond yields are telling us is that yes, there is an active management in place to try and stimulate the Chinese economy, thus the need to intervene and lower interest rates.
The People's Bank of China (PBoC) has recently taken several steps to stimulate the economy, which have contributed to the decline in Chinese bond yields making cuts to the their following programs:
The 7-day reverse repurchase rate and the medium-term lending facility (MLF) rate.
Cut the RRR for banks, which means banks have to hold less money in reserve with the central bank in regards to their Reserve Requirement Ratio.
Has reduced mortgage rates for existing homeowners and lowered the minimum down payment requirement for second homes.
Introduced measures to support the stock market, such as creating new structural monetary policy tools to facilitate stock market investment.
What kind of arbitrage “carry trades” are going on here now? Is China the new Japan??? Sure in hell seems that way and what does that ultimately mean for the global carry trade? The Yuan or Renminbi (official name) has lost 17.2% in just under 2 years and it probably would have lost much more if the PBOC hadn’t put forth Billions to defend this peg band:
Is this why our bond yields have jumped? Has Chinese selling of US treasuries led to a forced buying in their own domestic bond markets? The bigger canary in the coal mine is how will all of this eventually spill over into the global equity markets? Generally bond volatility is a death nail for equity markets because that means generally fixed investment money doesn’t like to be disturbed and when bond volatility picks up, well let just say fixed income bond risk = trillions in capital at risk.
So are we surprised to see moves like what is occurring in the US bond market? Yes and no, historically if the FOMC is on a rate cut cycle, the short end (2Y and less) moves due to the FOMCs direct control of Fed Funds, but the long end lags a bit. Now let’s take all of this in context, yes we generally move from an overly inverted US yield curve (shorter end rates > longer end rates, see blue and red lines below) and to a more normal sloping curve (white line). In this current cycle this has generally been the case. Here look at the current US bond market yield curve and compare it to the prior yield highs and lows, in particular pay attention to the “slopes” of the curve. Yesterdays yield curve is depicted in white:
You can see that the 2Y yields are about 92.7bp lower then the Oct2023 high shown but the 30Y yields are only 8.4bp lower. This dispels any talk out there the FOMC doesn’t control bond rates, it certainly does at the very short end. As the famous FOMC head Alan Greenspan once said, you can think of our monetary policy control let’s say on the 10Y rate from the aspect of the 1Y rate in 10 successive increments, meaning he truly felt that if they would control the level of the short rate (1Y or less) that eventually it over time all things considered bring down the level of the longer rate.
Now I have studied monetary policy for over 2 decades and the mantra has always been, “don’t fight the Fed”!
I don’t think the bond market buys the fact the FOMC (Fed) is going to be able to continue cutting rates, but the US govt 2Y is saying something else, that it may just be able to. Remember the long end is a function of many other inputs, not only domestically but globally and we don’t live in a simple financial construct any longer. We live in a very complex structure where money moves at a click of a mouse, in fact our structure is so complicated, that our own US Secret Service allows the US dollar to be digitally counterfeited by Tether. I still to this day cannot understand how they allow this, (unaudited btw) company to issue digital versions of the US Dollar, but that is where we are at.
I think what we have now is a general public and a bunch of AI unrealistic non thinkers that believe that inflation is here to stay, that the economies are doing great because the stock markets are at all time highs…well when things of the obvious nature like stock prices do indeed turn, its generally too late to make the call that the global economies have soured. When this does happen, I expect bond yields to crater at the long and the bond will outpace the short end down in yield for some time.
Guys these are very complex topics and our goal is to just quantify the current price levels in a rationale format and I hope you are understanding that. So in principal we should expect the front end of the US yield curve to be anchored and the long end to eventually play catch down. For now the 30Y has seen a massive near 100bp rise since Sept. 2024:
Are we pushing the yield upside limits here in the long end? I certainly think so and with a US yield spread in the 2s30 at 61.7bp that steepness seems pretty consistent for the fundamentals and the adjustment out of the neutral FOMC stance to the current cutting regime. In fact as you can see in the data from yesterday’s bond markets close, the 5s30 is 44.5bp, once the FOMC does start to panic cut rates further, we would expect this to go well over 150bp positive:
Ok guys this is my wheel house, I can talk bond market action all day, but let’s move on. Let’s look at yesterday’s settlements where we added the cash bond prices from 1/6 as well. The Nasdaq and Bitcoin were the big contract losers on the day with Gold the big winner:
Here are the 5 and 30 day rolling change results, every sector seems lower except energies, Nikkei and US Dollar over the last 30 days:
As far as the Magnelibra CTA Markets Sentiment Tracker, the changes are listed in the top right as Nasdaq and Nat Gas are flat as of end of yesterday data:
Moving over to the MEGA8s the complex was hit pretty hard dropping over $500bn in market cap on the day, with Nvidia and Tesla the big losers on the day. CEO Jensen of Nvidia made some comments on AI computing, setting a range of time expectations and well, that didn’t go very well! As far as the hedge we lowered the strike to the QQQ 525 Call for the week:
Ok now over to our MicroStrategy Tracker, MSTR was hit a bit yesterday taking back half of the 2 day gains almost and currently the strategy overall is posting a +2.78%:
Ok that is it for today, let’s take one quick look at a few of the technical charts that are on our mind. First up the SP500 futures, the levels to watch are the same ones we have had up for awhile now, 6042 on the upside and 5851 on the downside in the SP500 March futures. Right now it is a toss up on which way it can go but considering we are below the 6042 tells us the sellers have the upper hand right now and will continue to sell it unless it breaks that upside level again:
Next we have the Nasdaq March futures, and the area to key on is still 21608 and we have now broken that area and just like the SP500 sellers are in control here until that level is retaken. For now sellers may continue to press into Friday’s number:
The same risk off set up is brewing in Bitcoin and you guys know $97k is our key marker there. The bigger concern for Bitcoin bulls is the fact that now for now the 21VWMA and 50 have now crossed. This should ignite the momentum HF algo mechanicals to start borrowing and shorting:
Ok that is it for now, anyway I hope you got something out of today’s lecture and as always, please subscribe and try to support our work, if you are a crypto investor and want to support that way our BTC address is included below and no Magnelibra does not care about anonymity and on-chain analysis tracking of our addresses, not yet at least! We know the future is decentralized, we know the future is trustless systems and we have been a part of this movement since the very beginning! Its a new year, make the most of every minute and take time to recharge your own batteries, turn off the electronics, go outside even if its freezing, just close your eyes and see what comes to your mind! Till next time, cheers.
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