toronto rates + credit pm
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Soros: At some point every bubble will experience the big *test*, where the reflexive feedback loop flips from positive to negative. During the test, the market will try to take out the highly leveraged bulls. You do not want to own the asset during the test.
But if the market fails to push down prices enough to clear out all the bulls, then you have the greenlight to jump back in with even more size than before the test. The failure to clear out the bulls proves the broader trend is incredibility resilient.
After the test, the next phase of the bubble is the acceleration phase where it extends much higher and much longer than anyone expects.
In today's case with AI, perhaps if the market was to learn over the next few weeks/months that AI is resilient to the political cycle, then we could enter the acceleration phase?
In prior Fed hike cycles 2y rallied more than -50bps only when hikes finished. Biggest 2y rallies when hikes were NOT finished: -43bps 2006, -44bps 1999, -53bps 1994. 2y has rallied -44bps from September high FYI.
Entire US yield curve has rallied +40bps and positioning is relatively clean and maybe still slightly short. 5y only just started outperforming rest of curve after being the absolute worst maturity for last 12 months. 5y relative performance has been a good leader at general yield turning points in 2026 too.
Election results have turbo charged bond rally and turbo charged 5y relative performance too. Feels like short duration here is asking for pain until a new catalyst shakes sentiment up. May as well sit long some 5y duration and see where it takes us.
What's going to stop the bond rally here?
1. Iran escalation headlines or
2. Neocloud equities bounce or
3. String of strong jobs and inflation beats.
Don't think Iran update is likely before Trump/Xi meeting in 2-3 weeks. Why would neoclouds bounce now? Jobs beat could come Friday but then it's a bit of a wait until CPI and PPI.
I might take off 5y duration or flip short 2y for Friday NFP release. I think NFP comes hot and we try to bear flatten on Friday morning. But if we don't get a big bear flattener with follow thru Friday afternoon and no other catalyst comes then I will likely go back to being long some 5y duration thru the weekend.
Ya we have rallied a ton. It's hard psychologically buying bonds here because of that. But I think with small size and looking for exits is the way to do it. The fundamental narrative is too good to fade right now. Feels dumb stubborn trying to short here and me being mostly neutral on duration the last 2 weeks has been BORING! I need some action to feel out the post-republican and (potentially) post-neocloud regime.
3 part story for curve today:
1. Started the day as bear flattener AGAIN (4-day streak): 2y +5, 10y +4, 2v10 -1 to new 1m low
2. Then Warsh flipped it to twist steepener: 2y -6 to low of day, 10y +2 to high of day, curve +9 to high of day
3. Then Vance/Iran story had brief bull flatten that faded: 2y -1, 10y -3
Full day: 2y -2, 10y +3, 2v10 +5
Have to trust the highest magnitude move which was the twist steepener in part 2. I hate twist steepener because you got 2y down but 10y up and therefore no clue on overall duration. But high magnitude steepening (+9!) off 1m lows tells me steepening is likely the next trade and you get good value here coming off 1m lows on 2v10.
Could be bull steepener (weak data, more AI slowdown, Iran deal) or bear steepener (no QRA change, gov and corp bond supply accelerates). Both are reasonable guesses. Bull flattener for the past 2 weeks probably out of steam but could keep going. Bear flattener just got murdered by Warsh.
So my odds point to steepener for curve with good size because entry levels are decent at 1m flats. But no size for overall duration (am small short 10y) until more clarity on price action, data, events.
Box trade of steeper US curve against flatter CA curve is an interesting variation too. IMO the BOC is looking committed to more hikes.
Feeling funny... how can Warsh kill forward guidance?
Let Jefferson/Waller/Williams guide the market to no hike (<10% odds), and then lmao side with the 3 hawkish dissents, flip 3 undecided voters like Cook/Barr/Powell (Powell won't dissent from Warsh), and surprise hike.
Market will stop listening to forward guidance from anyone. Also builds some credibility and distances himself from Trump before the House and Senate flip Democrat.
Regime change for duration positioning (bond bulls are truly back) or just a short squeeze panic and time to fade? I have small shorts I am considering upsizing.
"Becoming increasingly clear that we are re-pricing the left side of 2027+ growth distribution... re-think on AI trajectory... correlations reversed because prior assumption of forever capex no longer true"
1-day delay on my futures put/call data source but I'll guess the real-time ratio is flirting with the June lows after today's rally. Think mean reversion is the play until we learn more from Fed/Midterms/QRA. 10y is a short below 5.10 and a long above 5.30.
New BIS Bulletin talks about increasingly non-linear inflation risks with Iran dragging on longer than expected and inventories rapidly depleting. BIS using "non-linear" language is a trigger for me.
bis.org/publications/bulleti…
Since the June bimonthly central bank governors meeting at the BIS, the BIS has published 3 Bulletins that read overly hawkish. These will be heavily discussed at their next meeting in September.
Bulletin 133, Aug19 on TERM PREMIUM: “term premium weakens the currency, heightens concerns that fiscal will constrain central bank independence, raises costs for credit-reliant firms, builds higher inflation into price and wage setting… term premium feeds thru to inflation expectations more rapidly when debt is elevated… adverse non-linearities raise the cost of delayed policy action… paramount for monetary policy to focus firmly on the price stability mandate”
Bulletin 131, Aug5 on ENERGY SHOCKS: "inflationary impact of energy shocks twice as large when inflation expectations are above target... tight labor markets intensify wage demands as labor seeks to reserve purchasing power... energy price surge combined with loose fiscal is followed by higher inflation... central bank wait-and-see strategy risks ripple effects such as unanchored inflation expectations and may warrant hiking more quickly"
Bulletin 130, Jul28 on AI IMPLICATIONS: "central banks too accommodative if they underestimate demand or overestimate supply improvements... demand effects already large and observable, supply effects remain uncertain on scale and timing... AI capex has not come at expense of less capex elsewhere... AI capex driving upward growth revisions... labor displacement has been limited... uncertain AI translates into higher aggregate total factor productivity... near-term inflationary effects already emerging... AI inflationary if households boost consumption in anticipation of stronger future income... AI wealth-driven consumption can boost aggregate demand and add to inflation... financial markets may lift household consumption thru wealth effects"
Notable because BIS messaging tends to lead global central bank messaging.
bis.org/bisbulletins/index.h…
The question for bonds is are we going to "v-top" on yields (like 2022, 2023, 2025) or not?
Consensus last week with us10y at 5.35 was no because a v-top doesn't kill inflation (it didn't in 2022/2023/2025). Only sustained higher for longer can kill inflation.
Then we get a bond short squeeze on AI slowdown fears and now people think THIS CYCLE WITH THESE ECO NUMBERS will v-top at 5.35 during a week that had hot cpi and hot ppi?!
I don't think yields will do a v-top, but even if they do v-top, I still don't think this week was THE v-top... hence I am looking to short duration soon.
Some bond thoughts...
1. Price action feels more short squeezy than fundamental especially with hot cpi/ppi... how many were long tech + short bonds because "only high rates can crack tech" and now forced to unwind both sides?
2. Potential Friday 12pm dealer survey surprise (cut 20y auctions?) is preventing duration sellers from stepping in
3. If spreads behave then next week every corporate will want to issue bonds at these rates, especially with no data volatility, also gets them ahead of potential Fed volatility the following week
4. Bull flattening shouldn't keep going unless equities actually crack but all signs point to rotation not outright selling
5. 2y at 4.70 is only pricing 2 more hikes (remove the last 2 insurance cuts), don't think it can price less hikes without cold inflation prints which are now >4 weeks away
6. 10y at 5.05, who wants to buy 10y with a 4-handle? 4.98 is 50% retrace
7. This is still a long-term bond bear market right? You buy consolidations after breakouts to catch the potential face ripping reversals. Then you reset the shorts. You don't chase reversals until you have conviction in fundamentals changing.
I sold my duration longs today and cut my flattener in half. I want to be short duration next week if nothing fundamentally changes by Friday.
Some bond thoughts...
1. Price action feels more short squeezy than fundamental especially with hot cpi/ppi... how many were long tech + short bonds because "only high rates can crack tech" and now forced to unwind both sides?
2. Potential Friday 12pm dealer survey surprise (cut 20y auctions?) is preventing duration sellers from stepping in
3. If spreads behave then next week every corporate will want to issue bonds at these rates, especially with no data volatility, also gets them ahead of potential Fed volatility the following week
4. Bull flattening shouldn't keep going unless equities actually crack but all signs point to rotation not outright selling
5. 2y at 4.70 is only pricing 2 more hikes (remove the last 2 insurance cuts), don't think it can price less hikes without cold inflation prints which are now >4 weeks away
6. 10y at 5.05, who wants to buy 10y with a 4-handle? 4.98 is 50% retrace
7. This is still a long-term bond bear market right? You buy consolidations after breakouts to catch the potential face ripping reversals. Then you reset the shorts. You don't chase reversals until you have conviction in fundamentals changing.
I sold my duration longs today and cut my flattener in half. I want to be short duration next week if nothing fundamentally changes by Friday.