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Tag: yield curve

Season 3, Episode 17: Don’t Fear Inflation, the Fed is Right, 10-Year Yields to Drop to 0.5%

With Alfonso Peccatiello, The Macro Compass

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Alfonso Peccatiello joins the podcast to discuss his contrarian views on inflation, bond yields, and interest rates.

The guest doesn’t buy the inflation narrative entirely, believing credit creation has peaked. We are likely to see negative economic surprises and drawdowns in risk assets starting in the fourth quarter. The yield on 10-year bonds should peak at 0.5% due to a ‘Eurofication’ of the U.S. yield curve.

Content Highlights:

  • Why concerns about inflation are misguided (1:54);
  • The Fed is right. Inflation is transitory (6:37);
  • Demand for bank loans is “terrible,” despite extremely low yields (13:54);
  • Why do bond yields continue to drop? (18:16);
  • The bond market is saying growth and credit creation has peaked (23:24);
  • Why central banks’ digital currency experiments are potentially a game-changer (27:49);
  • Background on the guest (33:04);
  • The ‘four quadrant’ approach to macro investing and where we are right now (36:26);
  • The Fed tightening cycle should start in late 2022 and peak around 0.75% (47:50);
  • How low do we go on the 10-year this cycle? (57:00)

More Information on the Guest:

Not intended as investment advice.

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Contrarian Calls, Revisited: Barry Knapp on Yield Curve Inversion

What Was Said

In this podcast’s pilot episode last April, economist Barry Knapp of Ironsides Macroeconomics discussed the economic news of the day: the 3-month/10-year yield curve inversion.

The conventional wisdom at the time was that the yield curve inversion would lead to recession in the U.S.

But there had been numerous “false positives” from the yield-curve indicator in the past, Knapp said: 1966, 1998, and 2005. “There was no evidence that the inversion of the yield curve was really having any demand side effects on the actual availability of credit,” he said at the time. “It’s not debilitating for growth.”

The U.S. consumer remained healthy as households continued to delever from the excesses of the 2008 financial crisis. “The savings rate is high, income growth is picking up,” Knapp said. While global exports were slowing, this was “not enough of a shock to drive the U.S. into a recession.”

Additionally, there were reasons to believe the inversion wouldn’t last long. The Federal Reserve was indicating that its next Treasury-buying initiatives were more likely to lead to a steepening of the curve.

Knapp was bullish on bank stocks, having upgraded his view in 2017. He also liked U.S. small caps, expecting a rally on domestic demand.

What Happened

Ten months later, there are no signs of recession for the U.S. economy. Financial stocks have done well, judging by the SPDR S&P Bank ETF (KBE), which is up more than 14% in the intervening months:

Small caps have also done well, with the iShares Core S&P Small-Cap ETF (IJR) gaining more than 11%:

The 3 month/10 year yield curve stayed inverted for a few months before steepening. It has since inverted again, though this time few economists are calling for a recession.

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Season 1, Episode 22: The Dangers of Interest Rate Volatility Risk, With Nancy Davis of Quadratic Capital

Nancy Davis of Quadratic Capital joins the podcast to discuss the danger of interest rate volatility risk.

The market is at “peak confidence of central banks being able to control markets” (2:27), as evidenced by the historic low in all gauges of interest rate volatility (5:36). The risks of stagflation (8:37) and a trade war with Europe (10:16) are similarly discounted. 

Background on Nancy (14:39), further information on her fund (17:23), why gold is an ineffective inflation hedge (22:05).

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