Discover and read the best of Twitter Threads about #DiveIn
Most recents (5)
#DiveIn: Collapse in Term Premium TP
▪️ TP negative again after being positive for most of 2021
▪️ Excess yield investors require/receive to commit to holding L/T bond instead of series of S/T bonds has turned negative
▪️ Investors now willing to pay extra to hold L/T bonds
1/10
▪️ TP negative again after being positive for most of 2021
▪️ Excess yield investors require/receive to commit to holding L/T bond instead of series of S/T bonds has turned negative
▪️ Investors now willing to pay extra to hold L/T bonds
1/10
With 10y UST yield at 1.18% & TP at -0.10% => 1y yield is expected to avg ~1.28% over next 10 yrs
Term Premium?
▪️ Compensation investors demand for risk that S/T yields do not evolve as expected
▪️ 10y Nominal = expected path of S/T yield over next 10 yrs + Term Premium TP
2/10
Term Premium?
▪️ Compensation investors demand for risk that S/T yields do not evolve as expected
▪️ 10y Nominal = expected path of S/T yield over next 10 yrs + Term Premium TP
2/10
▪️ Negative TP => investors willing to accept lower yield on L/T bond to avoid risks of rolling over their investments in series of S/T bonds with uncertain fluctuating interest rates
Thus higher Rates Volatility usually implies higher TP
Chart: ACM TP v/s MOVE Index
3/10
Thus higher Rates Volatility usually implies higher TP
Chart: ACM TP v/s MOVE Index
3/10
#China Credit Tightening?
▪️ Aggregate Financing AFRE or Total Social Financing TSF growth slowed to 11% yoy May v/s 11.7% Apr
▪️ Renminbi RMB Loan growth inched down to 12.2% yoy May v/s 12.3% Apr
▪️ Optically Broad Credit YoY charts look scarier than they actually are
1/9
▪️ Aggregate Financing AFRE or Total Social Financing TSF growth slowed to 11% yoy May v/s 11.7% Apr
▪️ Renminbi RMB Loan growth inched down to 12.2% yoy May v/s 12.3% Apr
▪️ Optically Broad Credit YoY charts look scarier than they actually are
1/9
▪️ To start, target Fiscal Deficit 3.1% in 2021 v/s over 3.6% in 2020 => bound to be fiscal tightening by design
▪️ AFRE outstanding stock indeed points to recent marginal slowdown relative to post-COVID trend
▪️ But AFRE stock still above more longer term (4yr) trend
2/9
▪️ AFRE outstanding stock indeed points to recent marginal slowdown relative to post-COVID trend
▪️ But AFRE stock still above more longer term (4yr) trend
2/9
▪️ Credit did tighten in 2021 v/s exceptional surge in 2020 (base effect) but 2021 still ahead of pre-COVID yrs of 2017-19 => better call it credit 'normalization'
▪️ Govt completed only ~25% of 2021 bond issuance in first 5m of yr => backloaded => likely pickup in H2'21
3/9
▪️ Govt completed only ~25% of 2021 bond issuance in first 5m of yr => backloaded => likely pickup in H2'21
3/9
US #Inflation #DiveIn: CPI v/s PCE
Also why FED follows PCE?
▪️ Attached Summary of differences
▪️ Since 2000, overall CPI ~11% higher than PCE
▪️ Definition:
🔹 CPI: Out-of-pocket spending by non-institutional Urban Consumers
🔹 PCE: Includes Rural & all personal sector
1/12
Also why FED follows PCE?
▪️ Attached Summary of differences
▪️ Since 2000, overall CPI ~11% higher than PCE
▪️ Definition:
🔹 CPI: Out-of-pocket spending by non-institutional Urban Consumers
🔹 PCE: Includes Rural & all personal sector
1/12
Four Sources of differences: Scope, Formula, Weight, Others Effects
1⃣ Scope Effect:
🔹 CPI: Consumer Price Index => Survey of Households
🔹 PCE: Personal Consumption Expenditure => Survey of Businesses
▪️ 25% of PCE spending not captured by CPI
2/12
1⃣ Scope Effect:
🔹 CPI: Consumer Price Index => Survey of Households
🔹 PCE: Personal Consumption Expenditure => Survey of Businesses
▪️ 25% of PCE spending not captured by CPI
2/12
▪️ PCE includes spending by Govt, Firms, Non-Profits on behalf of Households
- E.G: Medical spending = Direct purchases by Consumers + Spending on medical goods & services by Medicare OR Employer's Health Insurance
- E.G: Public school education not an out-of-pocket spending
3/12
- E.G: Medical spending = Direct purchases by Consumers + Spending on medical goods & services by Medicare OR Employer's Health Insurance
- E.G: Public school education not an out-of-pocket spending
3/12
#Fed Put & Financial Conditions Index (#FCI):
#Powell: “…would be concerned by…persistent tightening in financial conditions…”
🚩Just-for-fun graphic: Fed Put - Market’s search for Put’s Strike Price = Fed’s intervention threshold
🚩#DiveIn: FCI & Macro
1/12
#Powell: “…would be concerned by…persistent tightening in financial conditions…”
🚩Just-for-fun graphic: Fed Put - Market’s search for Put’s Strike Price = Fed’s intervention threshold
🚩#DiveIn: FCI & Macro
1/12
So why learn about FCI?
#1 Fed tracks FCI
#2 FCI affects GDP/Output
Traditional Keynesian => s/t Interest Rates affect GDP
Goldman’s Hatzius/Stehn argue (2018 paper) Interest Rates first affect FCI (empirically mild relationship) & FCI then strongly affects GDP (Graphic)
2/12
#1 Fed tracks FCI
#2 FCI affects GDP/Output
Traditional Keynesian => s/t Interest Rates affect GDP
Goldman’s Hatzius/Stehn argue (2018 paper) Interest Rates first affect FCI (empirically mild relationship) & FCI then strongly affects GDP (Graphic)
2/12
Financial Conditions Index (FCI)?
▶️One # to capture state of conditions in financial/banking system
▶️weighted average of indicators of interest rates, exchange rate, credit spreads & equity valuations
▶️each indicator expressed relative to its avrg & scaled by its stdev
3/12
▶️One # to capture state of conditions in financial/banking system
▶️weighted average of indicators of interest rates, exchange rate, credit spreads & equity valuations
▶️each indicator expressed relative to its avrg & scaled by its stdev
3/12
#DiveIn: #Inflation Breakevens (BE)
Given immense focus on fiscal, monetary & inflation dynamics, quick brush up on Inflation BE:
BE = Nominal Rate, N (US Treasury Yield) – Real Rate, R (US Treasury Inflation Protected Securities, #TIPS Yields, T)
1/8
Given immense focus on fiscal, monetary & inflation dynamics, quick brush up on Inflation BE:
BE = Nominal Rate, N (US Treasury Yield) – Real Rate, R (US Treasury Inflation Protected Securities, #TIPS Yields, T)
1/8
BE = inflation level that makes investor indifferent b/w buying UST or TIPS
= (approx) market-based measure of risk neutral inflation expectations
= TIPS indexed to non-seasonally adjusted #CPI
10y BE = (10y Nominal Treasury yld) - (10y TIPS yld) = 1.16% - (-1.04%) = +2.20%
2/8
= (approx) market-based measure of risk neutral inflation expectations
= TIPS indexed to non-seasonally adjusted #CPI
10y BE = (10y Nominal Treasury yld) - (10y TIPS yld) = 1.16% - (-1.04%) = +2.20%
2/8
Breakevens (from TIPS) actually do not capture pure inflation expectations
Nominal N = Short end Real + Term Premium + Inflation Expectation IE + Inflation Risk Premium IRP
TIPS Real R = Short end Real + Term Premium + Liquidity Premium LP
BE = N – R = IE + IRP – LP <> IE
3/8
Nominal N = Short end Real + Term Premium + Inflation Expectation IE + Inflation Risk Premium IRP
TIPS Real R = Short end Real + Term Premium + Liquidity Premium LP
BE = N – R = IE + IRP – LP <> IE
3/8
