Watch now (10 min) | Western Bond Market have rallied recently. Investors are reading a top to inflation pressures, but I see food inflation continuing, a view being confirmed by the JGB market. Treasuries look a short.
Nice article. Here are two thoughts I formed from it.
China imported anything and everything they could to substitute the use of Corn for Pigfeed as they built up their pig population post Swine Flu. The spike in Beef is really interesting to me as while the Chinese paid a premium for their Beef imports, it did cause a 2020 spike in US Beef prices (perhaps not as high). The net effect is
1. Any increase in Chinese and US food commodity imports would take away food locally from EM populations. This could lead to potential geopolitical risks/opportunities in Brazil, Mexico, Chile etc.
2. What other food commodities could be next in term of a similar spike to Beef caused by Chinese policy/population need?
Russell, second question from me. I was struck by your observation that the JGB seems to be a better predictor for certain macro things than US Treasuries (UST). Is that perhaps because UST is very much used as the world's best collateral, and JGB less so? So my hypothesis would be that UST price action is more driven by liquidity needs around the world, and therefore becomes somewhat erratic in forecasting the macro environment. Which makes JGB's the next best thing.
Hi Russel, is it not so that most JGB's are now bought mostly by the BOJ and the price does not reflect a 'fair market' price. Also from what I understand there is hardly any liquidity at this moment.
Breakdown Japanese Government Bond holders 2021, by type of holder. As of December 2021, the Bank of Japan held 48.1 percent of outstanding Japanese Government Bonds (JGBs). source statista
Russell, avid reader of your writings, and keep up the great work!
Related to your shorting treasury idea, what do you think of the life insurance stocks like CoreBridge, Brighthouse and Jackson Financial? All these are life insurance spin-offs from their old parents (AIG, Metlife, and Pru UK). They are probably extremely “boring” and neglected, but could the new rising interest rate macro environment be conducive to their re-valuation (up)?
Good points. I would point out that TBT is a double short of TLT. I had that position on but had to exit due to rolling over of rates. It moves fast by nature but if you like the short TLT trade then you might love the long TBT trade.
TBT is trickier - as you need to work how they get their short exposure. My exepiernce with "short ETFs" is that the roll cost tends to be very very high
In some previous post on GLD/TLT I expect we see a rerun of what happened in 1970s. At some point, you get a sell off in bonds driven by rapidly rising commodity prices... So if yields are surpressed, (ie TLT is supported) then I expect commodities to go much higher. Conversely if TLT is allowed to go, then I expect commodities to be more subdued.. So I have a view on GLD/TLT - but not just on TLT...
Thanks for the nice article. Couldn’t it be that since June 21 (start of the spike in your chart) money has been allocated to TLT because it’s been down 30% since then? Even the early 2000 lows are around 85, it’s fair to say that TLT has been punished quite a bit and that it doesn’t really look like there is a huge potential to go for a short at this point. Rates can stay high for longer that’s likely but it’s a different setup if you just watch it from the sidelines than entering a short at this time. What are your thoughts on this ?
TLT is really interesting. Its a constant maturity ETF - so it is constantly buying long dated bonds, and selling them when they become short dated... so unlike a normal treasury, it does not have a "pull to par" benefit. I need to crunch the numbers, but I suspect TLT can fall and fall and fall....
I look at GLD/TLT - with the view that the less interest rates rise, the more inflation we are likely to have. I expect GLD/TLT to have a very large move at some point - probably a combination of GLD and TLT moving
Nice article. Here are two thoughts I formed from it.
China imported anything and everything they could to substitute the use of Corn for Pigfeed as they built up their pig population post Swine Flu. The spike in Beef is really interesting to me as while the Chinese paid a premium for their Beef imports, it did cause a 2020 spike in US Beef prices (perhaps not as high). The net effect is
1. Any increase in Chinese and US food commodity imports would take away food locally from EM populations. This could lead to potential geopolitical risks/opportunities in Brazil, Mexico, Chile etc.
2. What other food commodities could be next in term of a similar spike to Beef caused by Chinese policy/population need?
The last Log Scale Chart is eye catching too.
Hi Russell, Greay Article. Wondering where your data on pork prices came from if you dont mind sharing?
Sorry for the late reply. The pork data is taken from bloomberg - but it matches up with USDA data...
https://www.ers.usda.gov/amber-waves/2020/february/african-swine-fever-shrinks-pork-production-in-china-swells-demand-for-imported-pork/
Russell, second question from me. I was struck by your observation that the JGB seems to be a better predictor for certain macro things than US Treasuries (UST). Is that perhaps because UST is very much used as the world's best collateral, and JGB less so? So my hypothesis would be that UST price action is more driven by liquidity needs around the world, and therefore becomes somewhat erratic in forecasting the macro environment. Which makes JGB's the next best thing.
Yes - that makes sense... JGBs are only owned by Japanese investors which makes it resistance to vagaries of liqudiity
Hi Russel, is it not so that most JGB's are now bought mostly by the BOJ and the price does not reflect a 'fair market' price. Also from what I understand there is hardly any liquidity at this moment.
Breakdown Japanese Government Bond holders 2021, by type of holder. As of December 2021, the Bank of Japan held 48.1 percent of outstanding Japanese Government Bonds (JGBs). source statista
https://www.bloomberg.com/news/articles/2022-10-11/trading-drought-worsens-in-japan-s-broken-bond-market?leadSource=uverify%20wall
I am short JGB's BTW
Yes - which is why the sell off in the long end so amazing. I think short JGBs is a great trade
Russell, avid reader of your writings, and keep up the great work!
Related to your shorting treasury idea, what do you think of the life insurance stocks like CoreBridge, Brighthouse and Jackson Financial? All these are life insurance spin-offs from their old parents (AIG, Metlife, and Pru UK). They are probably extremely “boring” and neglected, but could the new rising interest rate macro environment be conducive to their re-valuation (up)?
Could do - historically that has certainly been the case. I would need to take a closer look at their balance sheets.
Russell, was your account hacked? Or was this some sort of system generated message to all your followers?
hacked - working on it now
Good points. I would point out that TBT is a double short of TLT. I had that position on but had to exit due to rolling over of rates. It moves fast by nature but if you like the short TLT trade then you might love the long TBT trade.
TBT is trickier - as you need to work how they get their short exposure. My exepiernce with "short ETFs" is that the roll cost tends to be very very high
Hi Russell, thanks for the update. What do you think of TIPS here given your secular inflation thesis, now that they have positive yields?
Good question. Let me have a think and get back to you
Thanks Russell, so when you talk about short TLT what is your time horizon, from now to what price point/time? Thank, C
In some previous post on GLD/TLT I expect we see a rerun of what happened in 1970s. At some point, you get a sell off in bonds driven by rapidly rising commodity prices... So if yields are surpressed, (ie TLT is supported) then I expect commodities to go much higher. Conversely if TLT is allowed to go, then I expect commodities to be more subdued.. So I have a view on GLD/TLT - but not just on TLT...
Thanks for the nice article. Couldn’t it be that since June 21 (start of the spike in your chart) money has been allocated to TLT because it’s been down 30% since then? Even the early 2000 lows are around 85, it’s fair to say that TLT has been punished quite a bit and that it doesn’t really look like there is a huge potential to go for a short at this point. Rates can stay high for longer that’s likely but it’s a different setup if you just watch it from the sidelines than entering a short at this time. What are your thoughts on this ?
Much appreciated.
TLT is really interesting. Its a constant maturity ETF - so it is constantly buying long dated bonds, and selling them when they become short dated... so unlike a normal treasury, it does not have a "pull to par" benefit. I need to crunch the numbers, but I suspect TLT can fall and fall and fall....
Russell, when you say short the long bond or short TLT what time horizon do you have mind for cashing in on that trade?
I look at GLD/TLT - with the view that the less interest rates rise, the more inflation we are likely to have. I expect GLD/TLT to have a very large move at some point - probably a combination of GLD and TLT moving
Suspect you may be right on inflation but Western Government’s will do whatever it takes to create financial repression again.
Politically hard to financial repression if you have food inflation. My guess if the Fed cuts rates, the long end will sell off massively...
Any guess on the Fed fund rate in 2023JUN?
5.5?
Could be... if they don't raise the Fed Fund rate, then I would expect the curve to steepen and TLT to fall anyway... so thats why I focus on TLT