SignalPlus Macro Research Report Special Edition: Zero Risk Assets
Source: Investopedia
The sharp rise in bond yields brought temporary relief yesterday,Because two prominent investors have publicly said they are less pessimistic about U.S. Treasuries right now (more on that later);If we take a quick look at US/European/UK government bond returns over the past three years, heres what happens: For so-called safe zero-risk assets, the average capital loss on US/European government bonds is around 20%, and the loss on UK government bonds It is as high as 27% (including coupon). This doesnt seem to qualify as zero risk at all. The era of quantitative easing/zero interest rates has produced a whole generation of"TINA"(There is No Alternative) investors, who are putting their capital into everything but cash, and now that we are in a period of over a decade of reflection, the hangover from this party will sadly linger for a while.
In fact,Unprecedented upheaval in the global developed market fixed income sector has pushed equity-bond correlations to their highest levels in nearly 20 years, completely eliminating the risk diversification effect that traditional 60/40 portfolios rely on.. To make matters worse, the era of FOMO in capital markets has led to more indiscriminate risk-taking and excessive risk exposure by investors through volatility selling and other leverage operations.This makes the realized volatility of a standard risk parity portfolio higher than the volatility of its underlying stocks and bonds.
Yesterday, the 10-year U.S. Treasury note opened in a similar pattern as it has every day recently, continuing its decline, with yields already above 5% during Asian trading hours. This is because the marketThe Bank of Japan is expected to make YCC (Yield Curve Control) adjustments at the central bank meeting on October 31, causing Japans long-term government bond yields to once again hit new medium-term highs, and further contributed to the steepening of the overall developed market yield curve. At the same time, the absence of a catastrophic geopolitical escalation over the weekend also provided an opportunity for some investors to turn to the safety of high-quality assets. However, for$141 billion in new U.S. Treasury supply coming this week($51 billion in 2 years, $52 billion in 5 years, and $38 billion in 7 years), also gave the market another reason to sell U.S. government bonds.
As fixed income markets once again stare into the abyss,A flurry of tweets from Bill Ackman and Bill Gross (the OG Bond King) suddenly sets a floor for bond prices, as they explicitly support (or at least no longer bearish on) fixed income,The rationale is an impending economic slowdown and recession, which could occur as early as the fourth quarter.
Regarding the economic slowdown, the actual data surprises (hard data surprises) in the United States continue to outperform the concerns about soft data (forecasts or market surveys), showing that the economy is gradually improving and overcoming various concerns in the market. However, its worth noting that beneath the surface, cracks have begun to emerge, with regional bank stock prices retreating to SVB lows on continued loan losses and higher funding costs, while junk bond credit and CDS spreads have risen to The highest level in May.
Additionally, from a volatility perspective, amid growing concerns about bill supply and inflation expectations,Volatility in long-term interest rates (the term premium) has surpassed short-term volatility (the Fed), and the VIX in equity markets has broken through a one-year low, with implied volatility at its highest level since the SVB crisis, while SP 500 futures fell below their 200-day moving average for the first time since March. It looks like the fourth quarter of 2023 will be another challenging quarter in a difficult year.
In the cryptocurrency space, after last week’s false news about BlackRock’s ETF approval, prices are finally rising, and with a corresponding increase in volatility, traders seem increasingly confident that the SEC will approve BTC spot trading, And no longer doubt. also,View the latest BlackRock iShares S-1 revision filing, they have obtained a CUSIP (Registration Identifier for Securities Settlement), an important preparatory step for the upcoming launch, while also planning to create one in October 2023"Seed creation basket"(Similar to the initial project liquidity in the AMM pool).
Media analyst forecasts also significantly increase the likelihood of successful ETF approval,Because it is reported that the SEC has responded to the application and is no longer ignoring and delaying as before. Additionally, the U.S. Federal Court of Appeals effectively ended the SEC’s dispute with Grayscale in yesterday’s final ruling (the SEC did not appeal),This puts pressure unilaterally on the agency to move forward with the next step of approving the ETF, a major legal victory for the crypto industry.
The cryptocurrency market reacted extremely violently, with conditions not seen for months or even seasons.BTC surged to $34,000, resulting in the largest 24-hour short futures liquidation in months. In this price area above $31,000, brokerage gamma showed the worst negative value rangeWith implied volatility surging to its highest level in 3 months, are we finally seeing the light of day for the crypto market? After a long period of downturn and adversity, is the crypto bear market showing signs of picking up?
Please stay tuned!
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