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Inflation & Yields down, Bonds up

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Market participants signal the Fed is done hiking

  • Rate cuts are expected in Q1 or Q2 of 2024

This week, abetter-than-expected Consumer Price Index (CPI) report hammered bond yields as rate cut expectations jumped, signalling the end of the hiking cycle. 10-year US treasuries dropped below 4.5% on the news.

The Fed’s 2-year battle with inflation seems to be approaching the finish line. Unsurprisingly, the main culprit for the decline in headline inflation has been the nosedive in money supply (dipping below 0 for the first time in many decades), which has dragged down the CPI to 3.2%, displaying not a perfect, but decent enough correlation between the two variables.

A graph showing the price of a stock market

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Source: ZH

Market participants declare a victory lap over inflation as the final countdown to rate cuts begins. If history is any guide, and the above statement is true, it takes, on average, eight months from the last rate hike to the first rate cut (courtesy of Apollo’s Torsten Sløk). Hence, a rough estimate of the start of the cutting cycle would be March of next year.

Interest rate cuts are also priced in future contract trades, which give zero chance of extra hikes; expect cuts as soon as May 2024, indicating the hiking cycle is over.

Further, soft data only adds confirmation to that hypothesis, with the BofA Global Fund Manager Survey showing that Wall Street has never been so optimistic, with 76% of all surveyed anticipating the Fed is done hiking this cycle.

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Source: BofA Global Fund Manager Survey

Lastly, the US debt has been ballooning in response to the pandemic, then the Russian-Ukraine War, and now the Israeli-Hamas geopolitical conflict, adding 1 trillion in the last three months alone and reaching the astronomical figure of over $33 trillion.

If that was not enough, nearly a third of it is maturing within the next 12 months, according to Apollo. And raising with it are the annual interest payments on that debt, skyrocketing passed the $1 trillion mark for the first time ever! That’s totally unsustainable.

Hence, the US government will greatly benefit from lower rates, and its main knight (the Fed) will make sure inflation is slayed as soon as possible.

The market consensus seems to be that the worst is behind us. One key trade likely playing out is the long TLT (Long 20y+ Bonds). As rates go down, bond prices go up and disproportionately more on the long end, as long-term bonds are more sensitive to interest rate changes.

TLT is an excellent example of what could happen once the expectations of rate cuts get priced in. It has bounced off its $82 level, the lowest since 2007, and -2SD (standard deviations) below its mean.

The trend seems to be finally reversing, as indicated by the red arrow, quite possibly towards its long-term average of $115.

This dynamic has been anticipated by market participants for quite some time, especially given the unimaginable drawdown of nearly 50% that it has experienced since the Pandemic days.

A graph showing a line graph

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Source: Koyfin

The colossal volume spikes, as of late, signal that there are lots of dip buyers in the $80-$90 price range, implying that bond bulls are back!

Investors can long the TLT using our 5x 20+ Year Treasury Bond

Alternatively, they can short the TLT using our -5x 20+ Year Treasury Bond

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Julian Manoilov

Marketing Lead

Julian joined Leverage Shares in 2018 as part of the company’s primary expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Oktay Kavrak

Head of Communications and Strategy

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined Leverage Shares from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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