(1) US Treasuries: the calm before the storm
Last week, as I watched US Treasury yields falling, I remembered Jim Breuer's hilarious stand-up about what happens in your stomach when you start drinking. Everything is fantastic until tequila shows up. That's definitively the party we are all participating in. US Treasury yields stabilize, providing more reasons for risky assets to rally. As investors take on more risk, the macro backdrop strengthens until yields resume again to rise. As 10-year yields hit 2%, the music stops, and everybody is out.
Thursday’s rally has just been a setback for US Treasuries before they resume their rise to 2%. What happened is that, finally, Japanese investors showed up to the party by increasing their overseas long-term bond investments. Japanese investors bought more overseas fixed income securities than last week, only 13 times since 2008. The move triggered a squeeze within short US Treasury bond futures positions, rushing speculators to close them, putting more pressure on the downward direction of yields.