Today we saw an auction of US 4.5-year TIPS that resulted in a -0.55% nominal yield, as the market places a strong bet that the Fed’s efforts will result in the successful generation of inflation down the road. What does this mean for USDJPY?
Market bids up the TIPS
The strong TIPS auction result out of the US today caused a bit of a shockwave to run through the US bond market, as the implication of a negative nominal yield on the these securities says that the market is making a strong bet that the CPI will rise strongly over the next few years, considering that an investor can currently get 115 bps of positive nominal yield on a standard 5-year treasury. The strong auction result ironically (on the surface) saw bonds selling off heavily, as an extreme bet on TIPS suggests that fewer investors will trust the non-inflation indexed securities, some $100 billion of which, 3-,5-, and 7-year denominations, will be auctioned in the coming three days. Another trust issue apparently not heavily playing into today’s strong TIPS auction result: should anyone ever trust the official CPI statistics? If the TIPS buyers are very right on inflation, we should all be very scared, as the average duration of US public debt is rather short and the budget deficit would quickly spiral out of control if interest rates rise too quickly. One would think that the strong sell-off would put a floor under USDJPY, but let’s see how the next three days of auctions do.
The strong TIPS auction result out of the US today caused a bit of a shockwave to run through the US bond market, as the implication of a negative nominal yield on the these securities says that the market is making a strong bet that the CPI will rise strongly over the next few years, considering that an investor can currently get 115 bps of positive nominal yield on a standard 5-year treasury. The strong auction result ironically (on the surface) saw bonds selling off heavily, as an extreme bet on TIPS suggests that fewer investors will trust the non-inflation indexed securities, some $100 billion of which, 3-,5-, and 7-year denominations, will be auctioned in the coming three days. Another trust issue apparently not heavily playing into today’s strong TIPS auction result: should anyone ever trust the official CPI statistics? If the TIPS buyers are very right on inflation, we should all be very scared, as the average duration of US public debt is rather short and the budget deficit would quickly spiral out of control if interest rates rise too quickly. One would think that the strong sell-off would put a floor under USDJPY, but let’s see how the next three days of auctions do.
Chart: TIPS vs. standard treasuries
The chart below compares the development of the Jan 15 2016 inflation protected bond vs. the 5-year standard yield benchmark. Note the extensive widening in the divergence of the two as the market places a strong bet since the Fed started dropping QE2 hints in August.(Note also the slight comparison of apples with oranges here since the duration of the specific TIPS security we selected is different at every data point while the benchmark is always shifting to select the closest security to the five year duration - so the comparison is a bit rough - though the behavior of the two curves proves that it i relevant.) Data source: Bloomberg.
The chart below compares the development of the Jan 15 2016 inflation protected bond vs. the 5-year standard yield benchmark. Note the extensive widening in the divergence of the two as the market places a strong bet since the Fed started dropping QE2 hints in August.(Note also the slight comparison of apples with oranges here since the duration of the specific TIPS security we selected is different at every data point while the benchmark is always shifting to select the closest security to the five year duration - so the comparison is a bit rough - though the behavior of the two curves proves that it i relevant.) Data source: Bloomberg.
Revisiting AUDUSD and volatility
We showed the chart below some time back, and it is interesting to revisit it now that AUDUSD has made another attempt at taking out parity. The risk reversals suggest that upside pressure is waning – and note again how the past behavior suggests that risk reversal divergence is very interesting for market timers.
We showed the chart below some time back, and it is interesting to revisit it now that AUDUSD has made another attempt at taking out parity. The risk reversals suggest that upside pressure is waning – and note again how the past behavior suggests that risk reversal divergence is very interesting for market timers.
Chart: AUDUSD vs. 1-month Risk Reversal skew
The chart shows that as AUDUSD has revisited its high, the risk-reversal skew has tilted more sharply to the downside rather than to the upside. This could suggest tougher headwinds for Aussie bulls. Data source: Bloomberg.
The chart shows that as AUDUSD has revisited its high, the risk-reversal skew has tilted more sharply to the downside rather than to the upside. This could suggest tougher headwinds for Aussie bulls. Data source: Bloomberg.
No comments:
Post a Comment