Bond Market Overview Prerequisite Research

8/20/2019 Bond Market Overview Prerequisite Research

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US Bonds OVERVIEW

9th Dec 2015, by Daniel J. WantPerspectives on US Treasury Bonds

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www.prerequisite.com.au/researchCopyright © 2015 Prerequisite Capital Management Pty Ltd, Australia. All rights reserved. Past performance is not indicative of future results. The views expressed are the views of Prerequisite Capital Management Pty Ltdpublication and are subject to change at any time based on market and other conditions. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommend

Copyright © 2015 Prerequisite Capital Management Pty Ltd, Australia. All rights reserved. Past

performance is not indicative of future results. Neither Prerequisite Capital Management Pty Ltd nor

any of its employees, or any person(s) or firm who is represented within this publication shall have

any liability for any direct or consequential loss sustained by anyone who has relied on the

information contained in this publication. At no time does Prerequisite Capital Management Pty Ltd

make specific recommendations for any specific person, and at no time may a reader, caller or

viewer be justified in inferring that any such advice is intended. This publication has been prepared

by Prerequisite Capital Management Pty Ltd on behalf of itself and its affiliated companies solely for

the general information of clients or potential clients of Prerequisite Capital Management PtyLtd. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

The views expressed are the views of Prerequisite Capital Management Pty Ltd through the period

ending at the date of publication and are subject to change at any time based on market and other

conditions. References to specific securities and issuers are for illustrative purposes only and are not

intended to be, and should not be interpreted as, recommendations to purchase or sell such

securities. Prerequisite Capital Management Pty Ltd (ABN 27 141 060 933) is a Corporate

Authorised Representative of AIW Dealer Services Pty Ltd (ABN 59 153 322 420) AFSL 414256.

Disclaimer

General Inform ation


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www.prerequisite.com.au/researchCopyright © 2015 Prerequisite Capital Management Pty Ltd, Australia. All rights reserved. Past performance is not indicative of future results. The views expressed are the views of Prerequisite Capital Management Pty Lpublication and are subject to change at any time based on market and other conditions. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommend

Context: Positive for the US Bond Market I. Deleveraging has hardly started: Both in the developed world and Emerging Markets.

II. Capital Misallocation & Oversupply: Caused by (a) the cost of capital being held too low for too long, (b) psaving & investment (global current account) imbalances to persist much longer than they naturally would have

III. Demographic headwinds: Aging populations etc

IV. CAPEX peak and credit conditions tightening: Escalating credit spreads, lending officer surveys show tig

Commercial loans

V. Turn in the Earnings Cycle: Profits and margins starting to compress globally and in USA.

VI. Tide going out on Buybacks: Growing recognition of corporate irresponsibility

VII. Global Capital Flows shift: Material regime change in pattern of capital flows last 12 months potentially reprlast 7-15 years, engendering instability especially in Emerging Markets (highly elevated risks of banking crises &

seasons ahead). Global trade also weakening strongly.

VIII. Prevailing expectations towards higher yields: ZEW survey related inflation and interest rate expectationstage’ bear market psychology towards key commodity markets still absent (with vicious supply dynamics still re

particularly in energy and industrial metals)IX. Velocity still falling (both structurally and tactically): broader liquidity still tightening globally (overwhelm

X. ‘Speculative’ Positioning remains substantially negative towards Bonds: stronger ‘commercials’ persaccumulation of Treasuries. ‘Late-stage’ bull market psychology towards multi-decade rise in Bonds still absent

XI. Geopolitical Escalation and increasing trade barriers growing at the margin.

XII. Fed & Central Banks backed into a corner: trapped by excessive reliance on low interest rate policies (lasQE (over the last 7 years), unable to unwind such programs due to the extreme fiscal constraints of both the pub


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US Conditions

Tightening Lending Condit io ns...

US Bond Price

NYSE Margin Debt(people borrowing to

‘invest’ in the Stock Market)

US Lending Conditions

Tightening(i.e. harder to get a loan)

Loosening(i.e. easier to get a loan)

??

??

??


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The US Share Market

A turn in Corpo rate Profi ts & Margin Debt...

NYSE Margin Debt

US Annual Profit Growth (EPS)

US Profits

Increasing

US Profits

Decreasing

??

Key T

• Co

falCo

• Fatig

co

pr

Sto

ind

an

Defro

us

Tre


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S&P 500

(US Share Market)

Proxy of Share ‘Buyback’ Narrative(Ratio of Buyback ETF to S&P500... a rising line means that

‘buybacks’ are generally being rewarded by the market, a

falling line means that they are being punished)

The US Share Market

The Share Buyback ‘bid’ is falling away...


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US Conditions

Fixed Investment appears to be stal l ing...

Key

• Itf

E

b

a

w

p

a

• T

tm

• B

p


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Global Conditions

Capital Flow s are decisively s hift ing...

Key Takea

• These c

‘coincid

global F

global e

• The con

Reserve

‘regime

flows, w

term ris

world m

• In the cthis bod

Bonds, a

tend to

Govern

of econ

weakne


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Inflation Expectations??

ZEW Sentim ent Surveys...

Expectations of higher

short-term rates

Expectations of lower

short-term rates

Expectations of

rising inflation

Expectations of

falling inflation

US Bond Yield(interest rates)

Targeted Fed Policy Rate


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Commodity bear market far from done...

WTI Light Crude Oil Speculative Posit ionin g Key Takeaways:

• The grey line s

long) positions

community tow

• Notice that Spe

that the Oil pri

• Even though th

$60 a barrel sin

betting heavily

• This persistenc

a large fall in p

circle where pr

supply, means

the ‘bear mark

of oil is over, th

of the ‘late stag

psychology in t

the bear marke

• This means tha

ahead, which is

bullish Treasur

Speculators betting thatthe price of oil will ‘increase’

Speculators betting that the

price of oil will ‘decrease’

Price of WTI

Light Crude Oil


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Inflation Expectations??

Tactic al Velocit y stil l fall in g...

Proxy: Tactical Velocity

(Real Economy)

US Bond Yield(interest rates) K

•

•


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Market Liquidity

Capital f lows becom ing more concentrated...

Ke

•

•

•

•

US Bond Yield(interest rates)


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Market Liquidity

The plumbing is p roblematic...

US 10 Year Bond Yield

US 30 year Bond Swap Rate

spread over 30 Year Bond Yield

Key Takeaw

• From a ‘t

rates sho

(i.e. posibecause

Bond sho

swap wit

(i.e. a no

• In practic

treasury

financial

term stru

• On balanindicate

funding m

• Anecdot

(red line)

for US Bo


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The US Bond Market

‘Accumulation’ Patterning...

Strong & pers istent Buy ing by Commerc ia ls . ..

(Speculat ive Commu nity

sel l ing just as pers is tent ly)

??

Key Tak

• The ‘C

typica

hands

usuallthings

rule o

• The Sp

positi

are ba

increa

• For th

sentim

investBonds

• We be

towar

years

poten

highe


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The US Bond Market

A mult i-year setup for anoth er substantial mov e higher in price?

“IF we have seen the top of the mul ti-decade bull market i n bonds THEN

thi s will have been the most widely recognised top in all of h istory...

So, given the context of this entire document, with deflationary risks abounding,

growth reasonably expected to stall/roll over and record corporate profits likely to

prove highly transitory (not to mention the flaw in perceptions concerning Fed policyeffects)… it would appear the record shorts in US bond markets and record pessimism

towards the asset class may well be laying the ground work for a significant move up

in bond prices (lower yields)… ”

...PCM Research, 20th January 2014

US 30 year Bond Yield (inverted)

giving an approximation of Bond ‘Price’ action (which is

Key Takeaways:

• For the last almost 3 years, we have heard ad-nauseam

that the US Bond Market has ‘topped’ or topping,

marking the end of the multi-decade bull market inbonds and presaging the ‘imminent collapse’ of bonds.

• For reasons briefly touched upon in this presentation,

and much further analysis not able to be included

within, we believe the Bond market is not yet about to

‘top out’ but rather we could see much more upside

first. In fact, the last two years have most likely

established a great ‘base’ for a move higher.


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“It was a period when a large part of the liquid capital of the country attempted to

crowd into the always limited area of riskless investment. The sharp recession of

1937-1938 had destroyed the last hopes of some of the most stubborn optimists

that 1932 was only a traditional crisis and that the United States would, as

always, recover to resume its climb to new heights of prosperity…When the war

ended, some people thought that the Treasury would not always be offering asmuch as 2.5%. Perhaps rates as high as 2.5% would vanish forever.”

…Sidney Homer, A History of I nterest Rates

(writing about the 1946 secular peak in the long-term bond market.) Hat tip: Lewis M. J ohnson writing here: http://www.capitalwealthadvisors.com/news-and-insights/


The US Bond Market

‘Late- Stage’ bull market psychology still absent...Key Takeawa

• As stated o

or were see

bull market

decade bea

will have be

market top

oxymoron w

markets ac

•

•

http://www.capitalwealthadvisors.com/news-and-insights/http://www.capitalwealthadvisors.com/news-and-insights/


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Context: Positive for the US Bond Market

Key Takeaways:

• In the context of this entire presentation (and an invitation for you to contact us should you wish to disc

macroeconomic issues in greater depth), we would submit to you that the US Treasury Bond Market is

for a substantial move higher over the next year or two.

• The key risk is that the Bond markets collectively start to punish Government Policies, however, we b

some way to go before such issues begin to gain traction. In fact, in order for Governments to take the m

policy actions required to cause Bond markets to revolt, it is highly likely that we would need to see a si

higher in bond prices (amidst an environment of deflationary shock(s)) before policy-makers would hav

approval to escalate their policy experiments beyond the thresholds necessary to upset Bond markets a

the generally deflationary/low-or-no-growth conditions.

• Due to regime change dynamics that are starting to force an unwind of the last 7-15 years worth of conof the issues touched upon in this presentation, we believe that investors around the world are likely to

increasing amount of ‘disorientation’ in the seasons to come. Such will require, almost demand, a slight

approach to portfolio management as the changes in capital flows are likely to be quite paradoxical (& s

times, and we would anticipate some larger swings in Velocity and increasing volatilities as well. In fact,

with regards to global velocity measures that we would submit will be one of the key metrics to mon

confirm (or pre-empt) any possible turn down in the Treasury Bond markets.


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About Us

Who is PCM?

PCM is privately owned by four Australian families with a combined 77 yearsexperience within the investment and financial services industry.

PCM manages investment portfolios, provides research and is a trusted advisor

within a variety of contexts. We work with private individuals, financial advisors,

companies and professional investment managers in order to help them achieve

better investment results within a dynamically evolving world.

PCM was founded primarily as an investment solution for our own family &

friends, knowing that if we could design something that was compellingenough for us to be fully invested in, then others would like what we do too.

As such, we subscribe as much as possible to the way the Romans would build

their bridges… for the first load-bearing test of the newly made bridge, the bridge-

builders and their families would stand under the bridge that they had jus

constructed as a testament to the work that they had just performed.


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$500,000

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$560,000

$580,000

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CORE Portfolio

Strategic Opportunities Portfolio

PCM 60/40 Portfolio (60% Core, 40% Strategic)

S&P/ASX 200 (Total Return)

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Portfolio Update...

PCM Abs olute Return Superannu ation & Investment Portfol ios

CORE Portfolio• Conservative Capital Preservation Mandate

• Only ASX listed securities

(shares, bonds, ETFs, etc)

• Domestic focus (Australia)

Strategic Opportunities Portfolio• Conservative but more Proactive Mandate

• Only ASX & NYSE listed securities

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No Derivatives

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No Inverse ETFs

No Illiquid Securities or Investments

No Opaque/Expensive/Complicated

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(only index funds, ETFs and direct securities)

Totally t

direct-s


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Portfolio Overview...

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“For they shall be like a tree planted by the waters,

Which spreads out its roots by the river,

And will not fear when heat comes;

But its leaf will be green , And will not be anxious in the year of drought,

Nor will cease from yielding fruit.” …Jeremiah (627BC – 586BC)

Di l i


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www.prerequisite.com.au/research

Copyright © 2015 Prerequisite Capital Management Pty Ltd, Australia. All rights reserved. Past performance is not indicative of future results. The views expressed are the views of Prerequisite Capital Management Pty Ltdpublication and are subject to change at any time based on market and other conditions. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommend

Copyright © 2015 Prerequisite Capital Management Preserved. Past performance is not indicative of future result

Management Pty Ltd nor any of its employees, or an

represented within this publication shall have any liability f

loss sustained by anyone who has relied on the information

At no time does Prerequisite Capital Managemen

recommendations for any specific person, and at no time ma

justified in inferring that any such advice is intended. This

by Prerequisite Capital Management Pty Ltd on behalf of its

solely for the general information of clients or potentiaManagement Pty Ltd. It is not intended as an offer or solicit

of any financial instrument. The views expressed are the

Management Pty Ltd through the period ending at the date

to change at any time based on market and other condi

securities and issuers are for illustrative purposes only an

should not be interpreted as, recommendations to purc

Prerequisite Capital Management Pty Ltd (ABN 27 1

Authorised Representative of AIW Dealer Services Pty

AFSL 414256.

Disclaimer

General Inform ation

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