#214: Mike’s Crystal Ball for Bonds

S2N Spotlight

I will start today’s letter with my view on interest rates and then provide some supporting evidence or a lack thereof for my decision.

On Friday I set the scene that the government bond market is essentially a function of the government’s need for cash, and the pricing is derived from the management of the said cash. It is clear there is going to be a constant need for more funds, hence the increased supply of debt to the current load. Will there be enough demand for US government paper backed by the world’s strongest economy and only reserve currency?

The answer is sure there will be enough demand; the answer nobody knows is at what price (yield).

I am going to suggest that the secular bull market in bonds from 1980 to 2020 is over. From 16% to 0.60%, 10-year bonds rode quite the wave. A wave that inflated multiple bubbles over this period.

So I see rates higher from here; the problem from the evidence below is that we could easily go sideways or trade within a tight range over the next 6 months to 1 year. My call for higher rates is over the next 1-5 years.

I think a far better probabilistic trade is to trade the yield curve steepening. I think after the dust settles from possible early DOGE cost-cutting victories, we will experience the crowding-out effects on spending from servicing such a heavy debt load at current or higher rates. There have been few lessons learned over the last 3 decades from Greenspan’s low interest “cheap money” and Bernanke’s printing “free money,” so I expect to see the Trump helicopter and the printing press cranking in no time to keep the economy pumping. I expect to soon see a spread of 100 bps.

I also see another high-probability interest rate trade focusing on corporate spreads normalising. Given all the risks present, I think that there is not enough risk premium pricing in at the moment. So shorting high-yielding corporate bonds and buying quality treasuries should be a profitable trading opportunity.

Lack of Evidence

Here are a bunch of potential indicators that are all pretty neutral as to where inflation and bond yields are likely to go in the near term. This is why I am a lot more reluctant to call higher 10-year bond yields before the end of 2025. I think we will see higher inflation, but there is no evidence in the capital markets to suggest long-term runaway inflation.

S2N Observations

I am not sure why I am so triggered by the $TRUMP meme coin.

Throughout the 2016 Trump/Clinton election campaign, my wife banned me from saying I thought Trump would be elected at dinner parties. It always triggered people, and invariably there was an argument.

This time around it is so nice that one doesn’t have to be so shy about supporting The Donald. So far he seems a lot more organised than he was last time round, and maybe a little more grown up. I ask with tears dripping from my bloodshot eyes why the hell he would cheapen his crowning moment today with the launch of a $TRUMP meme coin on Friday night, the eve of his inauguration. To make matters even tackier, Melanie launched her own meme coin during the party festivities Sunday night, hours before the inauguration. Please tell me this is a joke; if it is, it isn’t funny, or perhaps I am just a party pooper.

For those who missed it. President-elect Donald Trump launched a cryptocurrency called $TRUMP on Friday night, taking the crypto world by storm and making some investors big money overnight.

The Trump’s made more money “on paper” over the weekend than his family has made in multiple generations in real estate. The market cap of the TRUMP coin reached over $15 billion before Melania stole some of his limelight with her own meme coin. Nearly 80 percent of $TRUMP supply is held by the Trump Organisation affiliate CIC Digital and Fight Fight Fight LLC, subject to a three-year unlocking schedule.

The first thing I looked at is how this coin makes money to support its hefty valuation. It’s important to note that while the coin’s website claims it is not intended as an investment opportunity, the rapid price increase and trading activity suggest that many buyers are treating it as such. So in other words, nobody has a clue how and if it will make money. Wow, Trump is on fire at the moment. Fight, fight, fight!!!

I know I sound like the ultimate crypto sceptic. I am actually quite progressive on crypto. However, as a student of mass psychology, I think we are witnessing a mania that has become untethered from economic reality.

There are not many cheerleaders as vocal and more all-in than Michael Saylor. He even has a public display of his company’s purchases of Bitcoin. Can you imagine landing him as a client if you are selling Bitcoin? There is no timing strategy here; it is simply BUY, kind of reminds me of my granny on the slot machines, slapping that SPIN button.

S2N Screener Alerts

The Israeli Shekel continued its amazing strength against a strong US dollar since the October 7, 2023, war broke out with a 3-sigma rally on the back of the ceasefire.