David Fuller and Eoin Treacy's Comment of the Day
Category - General

    India's Real 10-Year Yield Turns Most Negative Since 2020

    This note from Bloomberg may be of interest to subscribers. Here it is full:

    India’s faster-than-expected inflation print for April has pushed the pace of consumer-price rises above the benchmark bond yield by the most since 2020. The return of the negative real yield suggests the Indian debt may suffer a deeper selloff.

    India’s real policy rate -- the spread between the central bank’s main rate and inflation -- has been negative for several months, like almost all emerging markets (China, Brazil and Indonesia are exceptions). But the latest inflation data has turned the market-determined real bond yield negative too.

    India might just be paying the price for its hesitation to raise interest rates. The Reserve Bank surprised markets last week with a 40-bp hike, after previously saying it would stick with a dovish policy as consumption remained below pre-pandemic levels. It had hoped oil prices might come down, but crude prices remain above $100 a barrel and the nation’s consumer-price inflation is more broad-based, including items like clothing and footwear.

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    Dollar Won't Be Haven Currency of Choice for Long

    This note from Bloomberg may be of interest to subscribers. Here is a section:

    This in turn takes us to an interesting observation by George Saravelos, Deutsche Bank AG’s global head of currency research, who says that “we are perhaps now reaching the tipping point where further financial conditions tightening will start to place more severe headwinds to how much more we can reprice the Fed.” This will result in the dollar becoming less responsive to risk-off due to more dovish implications for the Fed path. And while it’s still early stages, Saravelos argues that “the market is starting to behave as if we may be approaching this tipping point.”

    Now, even if inflation does peak this year, that won’t mean central banks will exit their tightening path, but will adjust it accordingly. Just look at the Bank of England’s latest forward guidance and the divide within the voting committee. At the same time, and if we talk stagflation or recession, we should consider that the yen may attract haven flows once again given its low inflationary readings, Japan’s current surplus and so forth.

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    TerraUSD's Struggles Are a Concern for All Markets

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Much more important, if TerraUSD fails it will be a blow to the hopes of many traditional financial institutions that rely on liquidity to maintain stability. That includes central banks, exchange-traded funds, mutual funds, derivatives clearinghouses, securities dealers and many others.

    TerraUSD is an “algorithmic stablecoin,” meaning it attempts to maintain a $1 market price via an algorithm rather than traditional methods such as backing each token with an actual dollar. TerraUSD can be exchanged for $1 worth of another cryptocurrency, in this case Luna. Therefore, if the price of TerraUSD deviates from $1, arbitragers should force it back.

    The Federal Reserve, although it doesn’t officially target the value of the dollar, can use a similar strategy if it wants to influence the currency’s value. If the value of the dollar falls either in terms of purchasing power or foreign-exchange rates, the Fed’s two main policy responses are to raise interest rates to make the dollar more attractive to hold, or to sell assets to soak up dollars, reducing the supply, and pushing up the price. TerraUSD uses mainly the second strategy, selling Luna to reduce the supply of TerraUSD.

    The strategy relies on there being a liquid market for the asset being sold — mainly US Treasury securities for the Fed and Luna for TerraUSD. Unfortunately for the Fed, if the dollar’s value is falling, investors may not be enthusiastic about buying Treasuries, which pay off in future dollars and whose perceived credit may be impaired if too many have to be sold to soak up excess currency. TerraUSD has the same issue, the value of Luna is tied to the success of the Terra suite of products, which would be impaired by TerraUSD’s collapse

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    Email of the day on the 60/40 portfolio:

    For some time, the best-looking charts have been the yield charts, almost everywhere but particularly in Europe. They are a pure example of consistency.

    Questions: with the trillions of dollars invested in these securities how are the losses going to be reconciled? My personal belief was that rates could not go to where they seem headed because of the losses it would imply. Is there a lower rate case? How does this logic chain play out? The "prisoners" that own these bonds, who are they and how many of them are there? Is the 60/40 cookie cutter approach to managing portfolios getting crushed? Is income the new oil?

    Sorry for the multiple questions but intellectually the global losses in bonds has to be discussed in my opinion.

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    Email of the day on the Dollar and commodities

    A very well-respected cotton trader in Texas told me many years ago, that amongst all the factors influencing the price of cotton, the value of the dollar is by far number one. I guess this also is true for the price of gold to some extent. I was presently surprised to see how well gold has held inspite of the dollar’s strength. Am I missing something? I would be grateful if you would share your views on gold in the current environment. As always thanks for your very valuable service. 

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    Email of the day on Rolls Royce and selling investments

    Eoin, given how markets have deteriorated of late, could I be so cheeky as to ask why you have not cashed in on Rolls Royce yet? It looked like a great but when it near tripled to 140p, but it’s nearly halved now and you’ve sat tight. Surely there must have been a key technical level between then and now to warn you to sever ties with this one. I ask because I too sit on similar scenarios and I keep asking myself why I don’t cash in a while ago while the going was still good, making it more difficult to let go now, despite prices still sliding, seemingly day by day.

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