Yields Continue Higher
CBO highly pessimistic on the US economy given their 2024 Rate Avg
With US yields continuing the path higher, the pain trade for many bottom bond price pickers is becoming quite acute. This trend persists and it is catching many off guard as to the extent of this level of US Treasury selling causing yields to continue to rise, catching up to the Fed Funds rate. What is interesting and something that @CJKonstantinos pointed out on X is that the CBO projects the US Govt 10Y to average 3.8% next year with the 3mTbill average at 3.2%. This seems quite odd given the level of the Fed Funds today.
By our estimates, Fed Funds would have to fall almost 250 basis points next year, possible, but inconsistent with the FRBs current regime. History over the last few decades has conditioned investors to believe that rates are always lowered to accommodate a weakening economy.
However this all changed as the balance sheet at the FRB rises and since 2008 we have gone up 10x a massive injection of base money.
Today we know that higher rates extend duration of mortgage backed securities by effectively locking people into their homes given their current low interest rate. It also sterilizes the equity in the home as owners cannot refinance and borrow against that equity.
By locking up this equity and by increasing base interest rates and holding them there higher for longer, the FRB by inherent design has locked owners from extracting that equity.
Furthermore the net new interest created for investors like pensions and insurers increases their ability to match longer term durations and provides savers with nearly a Trillion dollars in risk free net new interest.
We don’t believe many look at higher rates in the way we do, but if you contemplate what we are saying then you will understand that the interest rate is now a deterrent to excess spending, which should decrease inflation, which is really what the FRB is targeting, because inflation left uncapped will destroy an economy very quickly. So for us we don’t believe any longer that the FRB will cut rates sooner rather than later, from the looks of where the Federal Funds rate is now and if it stays here, the US Govt 10Y will have to rise up to or greater than that rate over the next year. Even if the FRB pauses and does nothing the longer term notes and bonds should seek a rate above 5% closer to that Federal Funds cap.
Ok onto yesterday’s settlements:
As far as the Futures Position Tracker, one change to reduce the Five Year long exposure:
As far as the MEGA8s a mixed day which is good for our options hedge:
When we look at the MEGA8s market cap we continue to see the $12T area as resistance:
Finally let’s look at the US govt 2Y and 30Y yield charts, pretty amazing moves as the 2Y is now firmly above that 5.00% and the 30Y is knocking on the 5% door:
Ok that is it, we thank you for following our work and appreciate those of you that share it and absolutely thank all our sponsors for subscribing, as we understand that this information isn’t a useful tool if you yourself do not dig deeper to understand things and ultimately its up to you to read things that generate substance and perhaps incentivize you to learn even more. Till next time.