債券市場交易員的深度對談 20230830

建議可以自行看完英文版，寫的不錯。

筆者做中文的摘要。不過，結論的部分，筆者還是得說，第一，內容談的是相對長期因素，也會對整體市場產生深遠的長期影響，第二，這長期影響不僅僅只是對債券層面，也是對於其他風險性資產定價的挑戰。特別是期限溢價(term premium)

1.今年債券市場的下跌，主要的驅動力來自於兩者:經濟數據與部位(position)。持續走強的美國經濟以及真錢(real money)的淨多頭(代表認為利率已經見頂)是主要賣出的因素。簡單講，意思就是，大家從年頭到8月都在賭Fed的升息會讓景氣降溫，所以，大家的部位都有志一同的看多債券，最後發現經濟數據還好好的，然後搭上一些觸媒，就在八月把債券市場來一波sell off。

2.不過，債券市場依舊有些長線定價的變化因素。(簡單講，就是長期利率的中樞應該要上移)。裡面有些長線的因素，包含: (a) 20年來最大的財政刺激(fiscal expansion)，不是美國這樣做，全球都這樣做!(b)2010-2020年有超額儲蓄(saving glut)，因為嬰兒潮在那段期間為了退休多少做些準備，畢竟那段期間的前段有金融海嘯(Global Financial Crisis)。但是，現在真的在退休了，超額儲蓄被拿來用，市場上的活錢(free money)變少。並且退休的人數增加，會造成勞動力緊縮。(c) 過去10年銀行與保險機構在巴賽爾協定3下，被迫要多持有一些債券。(這也一直被認為期限議價term premium被扭曲的原因)。但是，當人們開始退休，流入銀行與保險的資金變少了，銀行與保險機構出手去買長債的力量也會變小。(d) 至於央行，從QE變成QT(BoJ除外)。簡單講，政府依舊想花錢，但是市場上的錢變少，並且市場上的債券大買家的力量受到制約或逆轉，使得債券市場的平均利率可能會較過往上移。

3.因此，這些交易員是認為，如果市場顯然有供需不平衡的狀況，那定價一定要有變化來改善跟解決或者說矯治這不均衡，需要higher for longer。簡單講，對於讀者跟筆者來說，可能會覺得higher for longer是啥?有意義嗎?其實，他的意思就是，市場的這不均衡，就是會導引出利率要持續升，而且保持一段時間。(不是high for longer而是higher for longer)。而他們認為利率時代性的調整的時機差不多到來。過往，市場需要3-5年來適應通膨背景的變化，現在距離2020年COVID的發生約3.5年，市場該是要進入到期限溢價(TERM PREMIUM)上移的過程。(寫到此，筆者越來越懷疑Ackman適不適跟一群人一起行動)。這邊得說，期限溢價的上移代表的就是均衡或中性利率的上移。簡單講就是認為高利率會變成新常態。(the new normal)

4.Real rate高不是好事。(之前筆者貼過real rate vs 股市)

5.未來的3到6個月，債券市場要吸收的發債量很大。私人部門(private sector)可能會要求更高的利率。

原文:

Tony Pasquariello: The story of this year is one of major progress on inflation, a Fed that we think is done, and some significant turns recently around the trajectory of Chinese economic growth. Yet, rates have only been driven higher across the curve in the past two or three months. What’s going on and how do explain the selloff in the bond market?

Muhammad Qubbaj: “How can you explain the selloff in the bond market?” has been the question people have been asking for the past eight months. We walked into this year, after a big shift in the federal funds rate, and the expectation that it would be restrictive enough to drive us into a recession, however it didn’t. People had to take a step back in terms of how they value the market and how they value their positions. The problem is, seven months later, we continue to have the same questions and the same direction of positioning across the client base. That is one of the biggest drivers of this, positioning. 

Another one is data disappointing. We continue to see the divergence between hard data and soft data and we continue to see surprise indices outperform. For inflation, the holy grail seems to be 2%, it is definitely achievable, but if you look at prior to the global financial crisis, it was an average, post GFC it was a ceiling, now with deglobalization, labor supply, politics, regulation, etc. it is likely to be a floor. For a sinusoidal data print that just means the average is going to be higher and the market is just being dragged to coming to terms with this data reality. So there is data, then positioning, when I look at the levered community whether it is in phone calls or roundtables the flows that we are actually seeing, they are on the margin long the market, not short, real money is long the market. The only thing that stands out from the short side is CTA positioning, which has been very short from a momentum perspective and the long end of the curve is the “shy short.” People who have been dragged kicking and screaming to get short the market can at least embrace getting short the long end of the curve because they can tag on R*, term premium adjustment, etc.. It is a more comfortable short for the reluctant recessionistas. So that is what I think is happening, positioning, flow, and data have all been drivers.

Anshul Sehgal: I agree with everything Q said. Starting with China, I think it is very concerning, but the other way to look at it is given their inflation, with youth unemployment at 20%, their real rates are actually higher than ours. One would expect them to be, given that you have 20% unemployment and they can slip into deflation quite easily, their real rates are higher than ours. So the differential actually does not affect the rates market that much, but more broadly with China where it is, it should have an impact on growth in the long run globally, and therefore on macro markets including rates. That is a valid thing to think about it, and we are worried about it, but mechanically those rates do not seem that far off. 

I think Q covered it well in terms of the rationale for why you are getting this selloff, and we cant explain why you are getting it right now, but setting that aside,  I think the way we have been thinking about the world is that a few things changed very dramatically on this side of the pandemic. Number one, you just had an incredible amount of global fiscal expansion, which is something that we haven’t had to worry about for two decades and is not just a US phenomenon but it is a global one. Secondly, you have a savings glut from 2010-2020, this was because baby boomers were in their early to mid-50s and at that point in time they wanted to save, they just lived through the GFC a major credit event, and they wanted to save for retirement. The same baby boomers we expect will be spending their saved wealth over the next decade. 

Concurrently, aging populations and a number of reasons make labor markets tight, so for us again the anomaly was the last decade, not what the market is doing right now. Now down to the brass tax, the people that were buying duration over the last decade were central banks, debt monetization, banks because of regulatory changes, Basel II then Basel III now Basel III endgame, which we will touch on later, and then they were crowding out the boomers, who through insurance companies or directly wanted to buy duration and that is why term premium, or real rates, essentially drifted into materially negative territory globally. If the boomers are not going to be there, central banks are not going to be there, banks are not going to be there, there is no reason to expect real rates to be 0. Whether the real economy can sustain materially positive real rates or not is another question, but central banks are price agnostic buyers of duration, and they are absent now, they were only present over the last decade, banks are impaired in their ability to buy securities, banks can lever and buy securities, the curve is materially inverted right now, so for any levered player to want to buy term duration here, it is negative carry. If I go long today, I need to believe that the market will rally in a reasonable period of time after that, otherwise I am bleeding carry on the trade. The only people who can actually buy duration is households.

TP: Big picture, if I take everything you just level set and I add on to that a run rate still above breakeven and the fact that the drag from tighter monetary policy is pretty much behind us now, what changes the trend of things? Isn’t everything a recipe for higher for longer?

MQ: I think the recipe is higher for longer. Just breaking out the amount of debt in the system, the supply demand imbalance, if we think of valuation and look at long term things that have changed, one is there is going to be a repricing of term premium for several reasons. First, econometrically we think it takes roughly three to five years to take a change in inflation environment to actually have it priced, we are near three and a half here. Second, we went from quantitative easing to quantitative tightening. Third, debt to GDP, both spot and CBO projections of how much spending we are going over the next bunch of years. Fourth, people are looking at flow versus stock, the supply demand imbalance that we have just seen in the market. Fifth, the possible R* reevaluation, which people are advertising may come as soon as Jackson Hole. Sixth, relative to yields, there has been buying power from central banks, buying power from foreign institutions, where as global yields rise and costs for them to buy the US relative to their old debt changes, we might find the marginal buyer from a foreign perspective become less frequent or come at a different clearing level. 

So we have all of these reasons why, from a long term perspective, we have to suffer higher rates. We spoke about inflation for the last 20 years being an anomaly and how it has changed for both cyclical and structural reasons. We went from a deleveraging balance sheet environment to a re-leveraging balance sheet environment, from a savings glut to a savings spending environment, and we saw a secular as opposed to cyclical change in unemployment. That is why I think the higher for longer or the new normal of just generally higher rates. It is amazing to see how other markets are going to react to that, whether it is equities realizing that this is the new normal and trading from that perspective, whether it is the relationship relative to gold and other commodities, it’s a new normal.

TP: Let’s talk about the Fed, headed into Jackson Hole tomorrow, what do you think they make of all this, notably the move in yields? What do you see as the arc of policy over the next year or so? A few more hikes or on hold and restrictive for longer, or the formal house view of cutting by Q2 of next year?

MQ: I think that the Sharpe ratio of going along for earlier cuts rather than later printing used to be very very difficult, of course the levels right now make it a bit easier, but we continue to see a data stream where the hard date vs the soft data are telling two different stories, that has been the case all year and continues to be the case. We recognize that there has been a repricing of inflation much lower and that maybe opens a door for the fed to cut earlier, but that was expected and has been expected in the inflation markets for the last 5-6 months, this is nothing new. For me, the worry is if we see any resurgence of inflation, a continuation in the strength of the data, and no real adjustment in the employment market because of the secular change post baby boomers, the Fed could get paid to sit on its hands. The counter to that of course is as inflation goes down, the level of restrictive real yields goes higher, but this hasn’t shown up in the data. Sharpe ratio wise, fading early cuts is the right momentum and the right carry view, but is it the right value view? It is not as attractive as it was before, but it continues to be attractive. There are more tails that are continuing to show that that would happen whether it is the student loans being introduced, a possibility of some other war, and unknowns, which usually pop up on that side of the distribution, but that is not how you plan policy.

AS: I can see adjusting cuts, absolutely, but a lot of this is priced into the curve. Whether from these level in yields and 1y1y rate, which is 100bps inverted to the funds rate, the market is pricing in a lot of that already. All of this is fine, and we have been trading short duration, not in massive size, it has been for all of the reasons we have discussed such as secular trends, so you want to monetize the secular trend, but you also don’t want to lose your shirt cyclically. But, you keep an eye out for things that can actually cause the Fed to cut more aggressively. Right now what is most worrying is the domestic housing market. We don’t have a good read on the domestic housing market because people are not really moving as much or buying as much because they have lower rates locked into their mortgages. So for the housing market at least, and not necessarily a broader statement for the economy, the lags are very long and the impact of that remains to be seen. So we watch the housing market very closely for that reason and there are cracks in the housing market right now.

TP: So given everything you have put on the table so far, what do you recommend for positioning in the rate market? This can be a directional view, this can be a curve view, this can be a vol view, or it can be a bit of all three?

MQ: The general view and the approach given how we view the economy, how we view the data, how we view the positioning was always biased to be short the market, biased to be short vol, tactically in and out of steepeners, and then at the same time looking for a great carry portfolio. This has manifested itself in the mortgage basis. The sharpe ratio of each one of these trades, which change over time based upon levels and valuations, I would rate them as short vol is the highest in the stack there, then mortgages, the mortgage basis would come next, and then direction trades such as short the market, short reds and short bonds. 

There are beautiful tails that can happen whether it is intervention money, R* changing, commodity prices going right back up after a period of inventory teardown, and hopefully a solution to the war in Ukraine. There are a bunch of different reasons that can interject some positivity into the market and you can see that number three on my list actually performed faster than the other two.

AS: I like carry trades, specifically diversified portfolio carry trades. Have a different view than the market on how risk premium should be priced in other asset classes such as equities and credit. The one thing that flipped on this side of the pandemic is the correlation structure in macro markets. So there assets that are passthroughs for inflation such as credit and equities, value equities certainly growth equities are their own beast, and credit too, that are less onerous in an inflationary world, so the returns on all of those assets should be compared with real rates. Compared to real rates, equities still don’t look particularly rich to us and equity vol doesn’t look particularly cheap at this level of equities to us. You don’t want to be long equities in massive size for crash protection, so short vol and long mortgage basis as the carry aspect of the portfolio. Short duration actually has momentum, carry, and value in our framework going for it. 

Other than that, I think when real rates are high, it is a very fertile trading environment in general. There are many more opportunities because central banks aren’t really pushing people out from these markets. So being nimble, being careful about not shorting tails, essentially really affords one the ability to trade around the market better. So short vol we like, but that’s not like shorting wing options, its just one part of a bigger portfolio.

TP: So do I have this right: in the end you want to be short the bond market, it is going to be tactical what point of the curve you are on, but broadly steepeners and you want to be short vol?

AS: For me, the belly seems safer here. The carry aspect doesn’t really work for the long end. If it is going to be households, since foreign central banks, banks, and central banks like the Fed are not going to be buying duration, and that just leaves households, the preference of households where on the curve they want to buy has been difficult. The US treasury does not know exactly the distribution of issuance right now, bills are well over the 20% mark they had set for themselves and obviously in prior years they were below that. The distribution of this becomes very difficult so we wouldn’t trade long the long bond, but the belly seems like the sweet spot, it hits carry, momentum, and value better.

TP: But in the end, for all of these changes your carry has been steady, and whether it is mortgage basis or short vol, you still want to have that?

AS: I think it rounds out the portfolio well.

MQ: And at this price – the levels of vol are great, the mortgage basis continues to be great and so we are not picking up pennies in front of a steamroller.

TP: Last market question. The rate story is not just a local story of course, it has played out across global governments, certainly the Bank of England and the Bank of Japan have contributed to the story, so do you guys have any strong views on non-dollar rates?

MQ: I will touch on the Bank of Japan quickly and its importance to the US fixed income market. At the end of the day if you are a bond investor, a fixed income afficionado, not being involved in the JGB market at this juncture is almost anathema to anyone who is an observer. You have to be involved, the asymmetry is there, it is fertile ground for something to change and we love that trade. We also are students of that trade and watch the three way game of chicken or balancing act between the dollar yen intervention, between the bank of Japan, and between local investors as well as foreign investors. It is a great system dynamics model and it affects US fixed income dramatically. We continue to think that the asymmetry is in that side and the likelihood of it being enacted sooner rather than later. The only thing to keep a keen eye on is looking at where the dollar level is vs other producer markets. We are very keen on knowing if there is going to be a lever pulled where the sale of dollars may come to the forefront, how may it affect us. The interesting thing in this world of tails is there are as many right side tails to fixed income as there are left side tails to fixed income, so it makes me more comfortable when I am saying I want to be short the bond or short the front end.

AS: As Q mentioned, we are short JGBs here. One thing to worry about there is Japanese banks are the biggest lenders to Chinese corporates, so depending on the way that China goes, things could move meaningfully. Also, Japan does import some disinflation from China, so all of those things are tail risks to being short, so we are short the 10y sector right now. One thing that is on the back of our minds, not really relevant right now, we saw this with the ECB and Fed, if inflation does get out of hand and you have a lot of liquidity in the system, you have to hike a lot more, the rest of the curve doesn’t really help you in terms of tightening monetary policy. So after having watched it twice, our view is that if the trade works out for say another 15 to 20bps, one should start moving it inwards sooner than we would otherwise think because distributionally one could still argue that being short 10s still makes more sense.

TP: This is interesting because a lot of what we are talking about is tactical, but I think if someone were to listen to this conversation seven or ten years ago, they would say “no way.” There’s no way that structurally that much has changed, and the longer time goes by, the more you think that the last cycle looks like the oddity.

AS: I totally agree with that, 100%, but what’s changed is the question. And the one thing is the boomers. Boomers plus the lack of global fiscal expansion, Europe could not fiscally expand because certain domains have not wanted to fiscally expand, they thought that would come at a cost to them. The US fiscally expanded more than it had in the prior few decades, but it wasn’t enough given the savings glut and the aging boomer population and a credit event makes people more scared so people wanted to save more. So all of this happened at the same time, and then Central Banks crowded out private buyers off global duration in an effort to get real rates really really low. 

Now sitting here where we are today, I don’t know how global fixed income markets will be able to absorb all of this issuance without central banks help because of what transpired. From 2007 to now the US fiscal stance has moved like 4x. The US has 4x as much outstanding debt today as it did in 2007. The private sector did not need to buy that debt, central banks were buying a lot, Basel made bank portfolios buy a lot, there was the commodity producing countries that were running massive surpluses, they bought a lot, and in this world you are having a lot of things happening at the same time: some component of deauthorization, some component of central banks moving away, some component of banks being impaired because of regulations. So now all of a sudden, over a very short period of time, private markets will have to absorb all of this debt issuance globally. What is the risk premium at which private markets will be willing to absorb is the debate that I think we will be having over the next 3-6 months at least, it could be longer. We’ll see how this plays out, but this is a material change from the prior decade.

TP: The total debt load in 2007 was what?

AS: It was 6 trillion for private markets, but today its about 24.

TP: The amount held by the private market today is?

AS: So it is 1/3 each of the Fed, sovereign wealth funds, and private markets. These are giant numbers.

TP: But that illustrates a story.

AS: The one way in which the Fed might actually have to cut very aggressively, because my central case is that you get adjustment cuts at some points in time unless inflation reaccelerates, but one scenario where they have to cut aggressively is if the backend of the curve becomes unhinged as it did in the UK. That would be a material move, it would be a shock, it would be a VaR shock to risk assets, and then the Fed might actually need to cut more aggressively.

TP: Ok, we are going to go to desert island. So movie, a TV show or a reality show, a book, and then a band or a singer?

MQ: I’ll start. I’ll say anything Will Ferrell, specifically Other Guys or Stepbrothers, in TV show The Wire, and Vanderpump Rules on the reality front (for those of you who haven’t watched this last season it is very meta, you are watching the past, in the present, with knowledge of the future), for book Lord of the Flies, and for the band some good Reggaetón I would say Bad Bunny or J Balvin.

AS: I have been reading the John Cochrane book, it is super helpful for this environment, it is not exactly a “fun” book, but if it were it would have to be Lord of the Rings or The Hitchhiker’s Guide to the Galaxy. In terms of music Led Zeppelin and for TV show, I love trash TV, 90 Day Fiance, and for a movie it would have to be Lord of the Rings.