Convexity

Insanity, Oddities, And Dark Clouds In Credit-Land

Distortions in financial markets keep growing, as central banks all over the world are desperately intensifying monetary pumping. What is currently happening in various bond markets as a result of this and other interventions is simply jaw-dropping insanity. It is not so much that it defies rational explanation – in fact, all of these moves can be explained. What makes the situation so troubling is the fact that investors seem to be oblivious to the enormous risks they are taking.  They are sitting on a powder keg.

Central Banks Are In A Lose-Lose Situation: Low-Rate-Policy "Has Rendered The System Profoundly Fragile"

"...abandoning the low interest rate policy would likely trigger a severe recession... but, continuing this policy would distort and corrode the economic structure even more, which would jeopardize the business model of pension funds, insurers and banks, and further inflate the real estate and stock market bubbles. The low interest rate policy has rendered the system profoundly fragile, with central banks virtually in a lose-lose situation."

With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict

There is now $13 trillion of global negative-yielding debt. And, as the WSJ writes, even a small increase in interest rates could inflict hefty losses on investors. With the 2013 "taper tantrum" the Fed sparked a selloff as it discussed ending its bond-buying program known as quantitative easing. A repeat "would be very painful for a lot of people" said J.P. Morgan. This is just how painful.

Gundlach Reveals His Portfolio Which Is "Outperforming Everyone Else's"

"People say, “What kind of portfolio is that?” I say it’s one that is outperforming everybody else’s. I mean, bonds are up more than 5%, gold is up substantially this year [28%], and gold miners have had over a 100% gain. This is a year when it hasn’t been that tough to earn 10% with a portfolio. Most people think this is a dead-money portfolio. They’ve got it wrong. The dead-money portfolio is the S&P 500."

When Narratives Go Bad

There’s a … tiredness … to the status quo Narratives, a Marie Antoinette-ish world weariness that sighs and pouts about those darn peasants all the way to the guillotine.

Goldman Expects Jump In Mortgage Refis, Blames "Burned Out" Borrowers

Due to the "new lower path for mortgage rates" Goldman is raising their estimate for 2016 MBS Issuance to $1.3 trillion from $1.2 trillion and raising their 2017 MBS issuance estimate to $1.3 trillion from $1.1 trillion. Goldman's  team cut their 10-Yr US TSY estimate to 2% from 2.4% ahead of an expected refinancing blitz.

The Last Castle To Fall: Can The Narratives Behind The S&P's Resilience Be Sustained

In the last few years, several markets/asset classes have shown signs of weakness, if not outright implosion: EU banks, EU stocks, Base Metals, Energy Commodities, Japan stocks, EM stocks and currencies. The bubble built in them by the excess liquidity provided by Central banks, as they were busy fighting structural deflationary trends (and crowding the private sector out of bonds), has deflated in most parts of the market, except two: US equity and G10 Real Estate.

JPM's Quant Guru Unveils The $1 Trillion Catalyst That Will Unleash The Next Market In Turmoil

"About ~$1,000Bn of S&P 500 options expire this week. The gamma imbalance turned towards puts yesterday ($9bn per 1% currently), and this will likely push realized volatility higher near term. Post expiry, clients are likely to roll put strikes higher, which will also be supportive of higher volatility. Yesterday’s large move on the VIX indicates short gamma exposure of dealers on VIX products as well." - Marko Kolanovic

Historic Milestone: Negative Yielding Debt Surpasses $10 Trillion For The First Time

The world passed a historic milestone in the past week when according to Fitch negative-yielding government debt rose above $10 trillion for the first time, which as the FT adds envelops an increasingly large part of the financial markets "after being fuelled by central bank stimulus and a voracious investor appetite for sovereign paper." It also means that almost a third of all global government debt now has a negative yield.

"The Volatility Regime May Be About To Shift" - JPM's Quant Guru Is Out With A New Warning

It has been a while since we had an update from JPM's "quant guru" Marko Kolanovic on key market support and resistance levels from the perspective of option gamma and key systematic strategies including CTAs, risk parity and volatility targeting, so we were looking forward to reading his latest report which came out earlier today. In it he reviews the latest flows and concludes that the suppressed realized vol regime we have enjoyed for the past two months may be about to shift, perhaps as soon as this Friday's option expiration.

The New New 'Deal' - "Markets Are Too Important To Be Left To Investors"

In the same way that FDR had an existential political interest in generating inflation and preventing volatility in the US labor market, so does the US Executive branch today (regardless of what party holds the office) have an existential political interest in generating inflation and preventing volatility in the US capital markets. Transforming Wall Street into a political utility was an afterthought for FDR; today the relative importance of the labor markets and capital markets have completely switched positions. Today, the quote would be "markets are too important to be left to investors."