Nomura: "This Was The Moment When Everything Changed"

From Charlie Mcelligott, head of Nomura's Cross-Asset Strategy


For the “right” reasons, the market continues to focus on tomorrow’s US CPI print, which will act as a referendum on the merit of the fixed-income repricing experienced since the start of December.  As stated previously, the list of ‘bearish catalysts’ for fixed-income is long and illustrious:

  1. above-trend global growth
  2. percolating US inflation and wages (i.e. last week’s AHE print)
  3. real-time US fiscal stimulus via tax reform (with further wage implications)
  4. US ‘deficit spending’ requiring massive Treasury refunding needs in 2018 (running nearly 2x’s 2017)
  5. particulars of the aforementioned tax reform, which will disincentivize US mega-corporates from ‘parking’ offshore cash in UST-instruments and credits, and instead likely force them to pivot to turning net sellers in coming months and years.

In hindsight, the ‘tie-breaker’ which drove UST 10Y yields out of their multi-month 2.35-2.50 range into this new stratosphere looks to have been the US fiscal stimulus / tax reform plan passing the initial Senate vote on December 2nd, 2017. 

By December 6th, the UST 10Y Term Premium had inflected from 1+ year lows (-62bps) and “hasn’t looked back,” +45bps to now just -17bps.  Why?  This was the point where the Fed’s post-crisis playbook of “perpetually low nominal rates and flatter curves” was then deemed by the market as potentially “old news.”  Instead, the market appropriately determined that in light of the economic expansion, the growing likelihood of higher inflation, the coming refunding / supply wave etc that rate volatility now had to move higher, because the bond market was, going-forward, no longer going to be “controlled” entirely by the same “forward guidance” regime of the GFC period….as a new era of interest rate risk was deemed to be upon us.

As such, USD 3m10Y Swaption Vol printed all-time lows on Dec 13th, while the MOVE index (UST volatility) bottomed Dec 14th.

Also on Dec 14th, the Quant Insight “macro regime” model for UST 10Y—essentially the “explainability” of the price of the underlying asset based off the key macro factor factors--peaked at 86% before collapsing all the way down to just 5% “explainable” by January 12th.  On Dec 14th, the Nomura FX Volatility Index put in a three year and a half year low ( since +65%).  For US equities, the 12m forward PE Ratio peaked Dec 15th.  By Dec 18th, Bitcoin also peaked at $18,674 ( since ‘melted down’ to the current $8465 level).  Since Dec 5th (3 days after Senate passage of tax bill), UST 5Y breakevens have rallied 20bps, while Gold has rallied $87 / oz.  The US Economic Surprise Index peaked Dec 22nd.  I could go on and on….

Point here being that the uber-ambiguous “something has changed in the market” meme that’s been going-around is based-upon the underlying change in perception with regard to a bond market that is waking from its slumber due to a new-found Central Bank willingness to normalize policy on account of actual signs of “growth” and “inflation”—ESPECIALLY after being “put over the top” by US fiscal stimulus.  The above observations are simply the manifestations of this mentality-shift in the market….qualitative observation into quantitative phenomenon.


Comments Tue, 02/13/2018 - 12:13 Permalink


Endgame Napoleon JRobby Tue, 02/13/2018 - 12:59 Permalink

What would happen if we......

  • hired some more temps or 1099-contract employees, counting them as new hires;
  • gave raises to a few babyvacationing managers who constantly churn the hard workers who generate a lot of accounts due to all-day, every-day attendance, retaining the colluding, frequently absentee mom-gang employees whose major household bills are covered by spousal income or monthly welfare and now-doubled, refundable child-tax-credit welfare;
  • gave out—with a lot of media fanfare—some one-time bonuses to everyone else, including to citizens living on earned-only income whose rent consumes more than half of their monthly pay, but whose “tax cut” stimulus is not upwards of a max of $6,444, as with the womb-productive citizens and immigrants who stay below the earned-income limit for monthly welfare that covers their rent / groceries and the cut off for refundable child tax credits, mostly by working part time, but instead—for the full-time, non-womb-productive workers—is only enough to cover a Costco membership, not to buy anything there. 

In reply to by JRobby

CRM114 Endgame Napoleon Tue, 02/13/2018 - 14:23 Permalink

It ends the same way it always ends.

The productive leave.

They aren't allowed to compete so they just work for themselves.

The Government tries to force them to produce to sustain the ponzi, but they just give up work and simply provide for themselves.

Empire collapses from both internal and external pressures due to complete lack of resilience and capability.

The rich and ruling classes are slaughtered. By everybody; the invaders, the oppressed, each other.

Beats me why the rich and the rulers think it will be any different this time.

The most successful survivors are the farmers/fishermen in the remoter areas, anyone with a craft, and the warlords.

In reply to by Endgame Napoleon

Peacefulwarrior Tue, 02/13/2018 - 13:25 Permalink

Thanks, but so far the lending effect cycles back and parks at the FED window before it trickles... The tax bill would ordinarily help in times of "real" growth is this actually creating a negative feedback loop as FED pulls out of stock buying game or is the rest of the Planet so economically fucked that more money funnels this way anyway?

In reply to by

LawsofPhysics Tue, 02/13/2018 - 12:16 Permalink

Changed?  LMFAO!!!

Are the useless fucks in banking and finance still allowed to use "mark to fantasy" accounting rules?

What is the interbank lending rate relative to the interest on a savings account or government bonds?

What do central bank balance sheets look like again?

Nothing has changed you stupid fuck.

"Full Faith and Credit"

same as it ever was!

slightlyskeptical Tue, 02/13/2018 - 12:16 Permalink

It is not a test.


Trump is blowing up the nations finances just so he can reward his donors with lower taxes.

Never republican again. Stupid fucks have all the power and know how to turn the country against themselves. Of course exempted from this are the mindless Trump and Clinton followers who continue to just bury their heads in the sand.

Endgame Napoleon slightlyskeptical Tue, 02/13/2018 - 13:12 Permalink

DemoRats, like RepubliCONs, court their donors, giving out goodies from Uncle Sam’s basket to their pander favorites, and making things even harder for everyone else who bothers to stand in lines to ensure that they have paychecks at $175k. In fact, many of the citizens and noncitizens, served by RepubliCON / DemoRat Uniparty Swampers cannot or do not bother to vote. 

Meanwhile, they have managed to change none more than the TV MSM into a 24/7 reality show, discussing which staffer will be voted off of the island for mostly gossipy reasons, while avoiding boring issues, like record numbers of citizens out of the workforce over multiple administrations, barely perceptible wage growth and 94% part-time / temp / 1099-gig-style “job growth,” supplemented by an ever-bigger pig out on child-tax-credit welfare for citizens and noncitizens, in addition to monthly welfare that accommodates parents in working low-wage / part-time jobs to stay below the earned-income limit / cut off for the welfare programs / “tax credits.”

In reply to by slightlyskeptical

NoWayJose Tue, 02/13/2018 - 12:28 Permalink

I made 4 trades in Treasuries after the initial big run up.  Two green and two red - broke even.  Sold the last of them last week when the bloated spending bill was passed, and Fed officials kept up the rate increase rhetoric.  

Treasury yields will rise from here, creating a cascade of bond sellers.  Yes, the selling will overshoot, but we could see 3.25 or more on the 10 year.

P.K.Snosage Tue, 02/13/2018 - 12:38 Permalink

Hindsight bias, also known as the knew-it-all-along effect or creeping determinism, is the inclination, after an event has occurred, to see the event as having been predictable, despite the fact that you and your bank actually failed to predict it, and the soft spoken Irish guy on the phone, continued to tell your rich (but stupid) clients to carry on buying the market, because everything was going to be just fine.

ktown Tue, 02/13/2018 - 13:20 Permalink

I took the taxcut and plan to add to the CPI (hookers and blow) I hate about your 401 (K) k meaning strikeout? /sarc  (buy 100 year treasuries like a wreck a fell a?)Cuban?