I need the laugh/cry for this

US dollar

June 9, 1792: $1 = $1

June 9, 2021: $1 = $1

— Jerome Powell (@alifarhat79) June 9, 2021

Friday Macros

Bonds Off Marginally...Equities Higher.... Our Contrarian View of Whats Next

In our early years trading bonds on different desks, we recognized the contrarian nature of trading... Sometimes the trend sustains and works, but more likely markets move against those that have the biggest exposures... Otherwords , markets move in a direction to inflict the most pain... We saw that this week in the treasury market where big trades were on for the reflation and the supply trade, the latter from the massive amount of infrastructure expected with the recent Biden headline... These trades got smoked as the 10 year moved from its high of 1.62 last Friday to 1.43 (1.44) last night and today... These traders did not see the reduced stimulus plan go from an expectation of 6 trillion to a 1.2 trillion to 1.7 trillion,as the Senate Parliamentarian weighed in.... They got the inflation correct, but the mistaken view that it was mostly transitory overwhelmed the headline of 5% YOY, highest in over 10 years.. Meanwhile what is going on in Bank Regulatory needs, Pension Fund long end duration purchases, and money market zero purchases moving out the curve, caught these traders off guard and the momentum players stepped in... HF, FM, CTA, Quants, Risk Parity... So we are now well through the resistance of 1.47 10 years and .78 5 years... Can it be sustained? Can we go to the next level of 10 years of 1.28... We say NO.

The Fed wants higher rates... Lower rates are good for the treasury but they can back fire for the sustaining of the economy... Janet Yellen was clear last week when she said that higher rates are good for the economy and show strength. This 20 basis move lower in rates this week is not what she wants... And not what the Fed wants either... The 5% CPI number is real... And the Fed has to incorporate that in their Fed models...we had this discussion with an old DC insider yesterday...rather than try to summarize, here is his words in a response to what we said to him

"Next week is looming larger than thought before the past 7 days. The potential for disappointment is huge. Either bond longs believe there are recessionary tendencies on the horizon or they think the Fed will pursue QE-infinity. Bond market participants may be whistling past the economic numbers today...but I would bet the Fed is not. Even if Powell just concedes they are "talking about tapering" next week, the swings in yields may be significant. Example?...From March 2017 to September 2017 the 10YR Note yield fell from 2.63% to 2.06%...but by Feb 2018 it was back above 2.95%, eventually topping out at 3.23% in October 2018...and the inflation data was not nearly as draconian as it is today."

While we do not subscribe to this type of move next week, we agree with the concept... We were clearly too soon in predicting 2% 10 years by early summer, but we are not believers of significant lower yields from here and expect a reversal now that the shorts and the reflation trades have been cleansed and the big boys are now all long. Enough with the contrarian view... On to today

Bonds had some good selling in 5 year futures overnight.. Markets have backed up marginally... Our level of 1.42 10 years have held and we probably will test the 1.47 level that we broke through yesterday... A close above 1.47 would cloud the bull flattening trade that many have put on this week. Equities continue to hit new highs...we have said this week that there are too many reasons for equity players to rotate and that the equity markets should have a bid until the end of the quarter... Maybe into July...but we expect a correction in the August/September time frame.

Corporates remain well bid... Over 3 billion was priced yesterday making the week to date closer to 36 billion, well above the original estimate. In junk 3 issuers priced 2.9 billion. The compression trade still has more room to go with BBB's trading at 5 year tights versus single A's and risk premiums coming under massive pressure as investors go out the risk curve to find higher yields. As a colleague wrote this morning "The triple engine of demand from domestic mutual funds, corporate pensions, and international insurers has fueled an 11 basis YTD tightening in IG spreads"

Have a good weekend.

While this stuff is still way over my head, I do feel that my continued reading of these updates on a daily basis is making me a bit more knowledgeable. Continued thanks to you AustinAg90.