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

    Treasury Market's Long-Dormant Term Premium Is Finally Reviving

    This article by Liz Capo McCormick and Luke Kawa for Bloomberg may be of interest. Here is a section:


    “We remain of the view that the U.S. term premium is still too low when conditioned against the macro outlook, and the uncertainty around it,” Francesco Garzarelli and his fellow strategists wrote in a note Tuesday. “We recommend preserving a short duration exposure and expect the rebuild of the term premium to lead to a steeper” U.S. yield curve.

    Goldman Sachs issued a short recommendation for 10-year Treasuries in November, which the strategists maintain. The firm’s model for fair value -- given economic fundamental and the expected pace of Fed tightening -- has the note at 3.09 percent, compared with about 2.8 percent now.

    The term premium is the extra compensation that buyers demand to hold longer-maturity debt instead of a succession of short-term securities year after year. A widely used valuation tool, it tumbled across world markets in the wake of the financial crisis as the Fed and its counterparts bought debt as part of stimulus measures.

    The 10-year Treasury term premium is negative 0.29 percentage point, up from a record low of negative 0.84 percentage point in 2016. As the name implies, it’s normally positive.

    Its increase in 2018 marks a departure from its typical downward trend during Fed tightening cycles. But much is different this time around -- namely, the central bank’s balance-sheet tapering.

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    Cancer 'vaccine' eliminates tumors in mice

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

    Injecting minute amounts of two immune-stimulating agents directly into solid tumors in mice can eliminate all traces of cancer in the animals, including distant, untreated metastases, according to a study by researchers at the Stanford University School of Medicine.

    The approach works for many different types of cancers, including those that arise spontaneously, the study found.

    The researchers believe the local application of very small amounts of the agents could serve as a rapid and relatively inexpensive cancer therapy that is unlikely to cause the adverse side effects often seen with bodywide immune stimulation.

    “When we use these two agents together, we see the elimination of tumors all over the body,” said Ronald Levy, MD, professor of oncology. “This approach bypasses the need to identify tumor-specific immune targets and doesn’t require wholesale activation of the immune system or customization of a patient’s immune cells.”

    One agent is currently already approved for use in humans; the other has been tested for human use in several unrelated clinical trials. A clinical trial was launched in January to test the effect of the treatment in patients with lymphoma.

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    Snap Bulls Bring on Bevy of Upgrades After Its First Beat

    This article by Beth Mellor and Jeran Wittenstein for Bloomberg may be of interest to subscribers. Here is a section:

    Snap Inc.’s first earnings beat as a public company, prompted at least five upgrades from analysts after the social-media company reported fourth-quarter revenue and daily active users ahead of estimates. The results blindsided short sellers who prompted upgrades from at least five analysts, and garnered a Street-high price target of $24 from Bank of America Merrill Lynch.

    Analysts lauded the reacceleration of daily active user growth and advertising revenue growth, better-than-expected average revenue per user and the impact of the app redesign.

    Still, some remained skeptical, with Morgan Stanley noting the potential that revenue trends could slow in 2018, while Susquehanna downgraded the stock amid competitive pressures from Facebook Inc.’s Instagram.

    Snap climbed as much as 33 percent at 9:45 a.m. in New York, trading above its $17-per share IPO price for the first time since July. Here’s a roundup of what analysts are saying about Snap’s results.

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    What do quant strategists have to say about the decline in markets yesterday?

    Thanks to a subscriber for this excerpt from Marko Kalanovic’s "Flash Crash, Flows and Investment Opportunities" at JPMorgan:

    Email of the day on volatility and bitcoin

    If one was long XIV, you just could be screwed...

    "Investors" who buy long vol ETN's should be really concerned - VXX completely failed to track the VIX today, going up only 33% as VIX slammed up 115.5%. Now of course they'll say that they squared up after hours, but still achieved maybe 60% or roughly a 50% tracking error. As you and I have discussed multiple times, the vol ETNs were just growing nightmare seeds waiting to be exploded upon the market. Now we may get to see just how good the counterparties are for those ETN's (as we whistle past the graveyard). The press continues to mistake the vol ETN's for ETF's - a serious mistake in thinking.

    My rule: never buy a loan based on shaky (or no) collateral that represents a derivative of a derivative of a derivative of a set of derivatives.

    I was and am long vol through simple puts and a straddle on SPY. Tomorrow my cash management rule will likely require rolling the puts down. Of course, it is another day, and we could see a super-fast reversal as always...

    Tonight, Bitcoin is slipping away towards 6,000. A distant cousin of mine, a late-50's woman whose life was spent (honorably) raising children while her hubby worked as a blue-collar guy in the nearby nuclear weapons manufacturing facility, called me to ask if she should invest in bitcoin. I tried my best to explain to her that she should only invest money she could afford to lose, and should only gamble away money she could afford to burn. I also explained that bitcoin was not a currency, but rather a commodity, and had no intrinsic value whatsoever. 45 minutes of pushback from her was my limit. I'm sure she is busily trying to figure out how to put that 8-year-old PC in her closet together so she can trade those golden promises of untold wealth. 

    I'm sure you're VERY busy these days :)

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    Email of the day on the Dollar

    One point: I hear from various parts /commentators and sometimes you also comment about the strength or weakness of USD

    Why is it that people see rising inflation in the US and - consequently - potential rate hikes as USD bullish?  Every time any news hints to potential rising inflation (like the wage growth number on Friday) the crowd jumps in and buy the USD for a couple for days (and sell gold like last Friday).

    Inflation is - if anything - eroding the purchasing power of the USD. I don’t get how this can be USD bullish.

    Not even the rate hikes by the FED to counter inflation are bullish. If you look back, the USD has stopped rising vs EUR when the FED has started hiking in Dec 2015. And when the hikes accelerated in 2017 the USD tumbled.

    On the opposite, countries fighting against deflation / or low inflation and low or negative interest rates like JPY or CHF, have positive trends.

    To me all this bullishness on the USD on rising wage numbers (hence inflation fears) look strange. I don’t believe it lasts beyond the short-term reaction of a couple of days (interesting: helped by the sell-off of risky assets USD was down big vs JPY today on Feb 5).

    P.S. one point I also hear over and over from commentators is that the interest rate differential is in USD favor and that is USD bullish.

    So what:  if you are a EUR or JPY investor, the forward premium that you pay on a ccy hedge wipes out your entire interest rate differential and more if you include broker spreads

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