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Bond Market Insights - Mon, 04 Dec 2023

Bitcoin bursting 40,000, Gold $2,085, Silver breaking $25.50, UST 10yr touching 4.2%. The FOMO trade is on, encouraged by soft global inflation data last month. US PCE up 3% y/y, EURO CPI +2.4% y/y vs expectations of +2.7%. FedSpeak is still urging caution, Powell saying that he is still prepared to tighten if appropriate. The market is pricing in two full cuts by June for the US, and at least one cut in Eurozone rates by April.

Jefferies, one of my favoured commentators, has gone full throttle on rate cuts, expecting a cut on March 20th followed by 50bps cut at each of the following 4 meetings, taking the fed funds rate to the 2.75%-3% range by September. Given the uncertainty on inflation there is quite a large dispersion of opinions on the future of rates.

In the words of the Inflation Guy, Mark Ashton, ‘perturbed systems normally don’t converge straight back to equilibrium”. The Fed’s massive push in 2020-22 caused a surge in M2. As private markets recovered post-covid the Fed began, albeit belatedly, to shrink the balance sheet and the ballooning inflation began to subside. However, the year-ahead inflation expectations measure in the University of Michigan consumer sentiment survey has leapt higher, with consumers reacting negatively to the disconnect between data points suggesting that prices are declining and their perceptions that prices are still increasing. Case-Shiller housing numbers showed y/y home prices rising again in sharp contrast to public forecasts where rents, home prices, and housing futures have been subdued.

In Asia credit dealers are running light on inventory, so any uptick in customer demand has a magnified effect. China property is in its own space as headlines on financial support are being countered by ongoing weak sales, downgrades and defaults.

Given the velocity of the rally there was some profit taking in some of the tighter Asia IG names, but with the lack of new issuance the market is not going to widen much as we approach the festive season.

Gold and silver have also benefitted in this rush to put on risk. Much of the investment community, particularly the private wealth sector has dedicated a proportion of their portfolio to physical precious metals. Conduit Group has recently added to the position through a physical precious metals note, with the metals held physically at Singapore’s Freeport, no lending or hypothecation allowed. When a holder wishes to redeem the note they choose whether to cash settle or to take possession of the vaulted bars.


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