hello my friends today is January 11th and this is Markets weekly so we had a bout of volatility in the market today some notable up dayss and down days in the equity Market but I think the real focus of the past week was the bond market where we basically had a global bond market sell-off and that will be the focus of our discussion today but before we continue I'd like to note that I've added a new section on my website called Market view so a lot of people asked me what my market views are so
I decided to share that uh in the form of a market view portfolio available to my subscribers now this is not intended to be investment advis nor is it intended to be a trading portfolio but it's just basically me to be a portfolio that represents how I view the market and I will update it gradually and as you can see uh last week I closed a put position in the S&P 500 and my core view is bullish rates so bullish bonds bearish the dollar and bullish gold and no equity exposure okay so today what I'm
going to talk about is two things one of course is the global bond market route and secondly the good jobs data we got in the US and these two are related okay starting with the bond market so looking at the global bond market we'll see that they really had a really big selloff the past week we focus in the US on treasuries but you know it it was is really bad in the UK as well and even Japan saw a rise in yields an exception of course is China where yields continue to decline but you
know they have Capital controls over there so they're somewhat disconnected from the rest of the world and as we all know they're suffering some idiosyncratic problems so what is driving this rise in bond yields well I think the first thing to realize when we approach the market is the richness of the market and what I mean is that the Market has many many different Market participants each have different views of the world each have different constraints uh for example an active participant in the market is uh the fed or other central banks and those guys
are not even trying to make money so this is where I think that the textbook explanations are very inadequate I take the equity market for example now if you read a textbook they'll tell you that Equity prices are the discounted cash flow of expected future earning ears so you can try to forecast earnings come up with a discount rate and voila you get some kind of sense of uh valuation now that all sounds totally reasonable but when you look at the public markets you'll realize that that's just not how the world Works look at uh
AMC or gme for example those stocks sometimes they surge just simply because roaring Kitty uh wants to post something has nothing to do with their earnings or more importantly we actually know who some of the big buyers in equity markets are Mike Green has done a lot of good work on passive investment and he shows that a lot of the buying in the equity Market is just through um see 401ks or Target a funds where an employee you know receives a bi-weekly paycheck some of that paycheck goes into the market and that's just money that
goes into the market irrespective of what expectations for earnings are so it's because of this big disconnect between the market and the textbooks that I created this free course called Market participants to help others understand some different perspectives on what drives price action this is of course part of my Marcus complete series that I created to help people understand the market because in my experience what is taught in schools is just not very useful so moving back to the bond market what are some common stories to explain the rise in yields now very common story
that I see on social media is because the market is afraid of inflation now maybe Trump is coming and maybe president Trump will spend a lot of money or something like that and so the market is freaking out about potentially out of control inflation wmer Republic stuff and so the bond market is freaking out now that's possible but then if you look at another traded asset uh tips you can see that tips implied inflation has been pretty steady for the past few years ranging between 2 and 2 and a half% we had a bit of
a recession scare a few months ago but as that scare receded we went right back up to to where the ranges are so based on this Market based traded uh view of inflation expectations there just doesn't seem to be a lot of fear of inflation in the market now to be clear this is not a perfect measure but it is a measure and I like it because it is tradable so if you have a view that's different from it you can take a position um other surveys of inflation expectations like consumer surveys you know show
some fluctuation doesn't seem like it's getting out of control but I would note that the people who participate in these consumer inflation expectation surveys are probably not going to be trading in the market so I don't think that they have a big impact of it now um there's some interesting survey evidence that suggests that there is a strong partisan tilt to inflation expectations whereas uh if you are if you supported the president you think inflation is going to be okay if you did not you you're kind of freaking out so but again the stuff is
on the consumer level and I I don't really think it flows through into the bond market which most people are not trading um another possibility for higher interest for higher yields is that the market is pricing in fewer fed Cuts now this in my view is what is driving the rise in the tenear yield now the good thing is that there's a very very very clear way to measure the Market's expectation of fed policy and that is suur Futures now silfur Futures very very deep and liquid markets very actively traded so you can be pretty
confident that this is a good representation of what the market is thinking now in this chart here I show the expected path of fed policy as of Friday and a month ago and you can see that there's been an absolute sea change in how the market is perceiving the path of policy so a month ago the market was thinking you know maybe the FED will cut as much as to 3.8% and then gradually gradually start hiking again as of last Friday the market is thinking that you know maybe the terminal fed funds rate is somewhat
above 4% and then the FED will start hiking again in 2026 and that just huge huge change in policy expectations is in my view what's pushing the tenure U higher not anything to do with inflation just that the FED again is not going to cut as much now why is the Fed not going to cut as much one is that the economy is stronger than they thought again they were afraid of recession and not too long ago they're not afraid of it now inflation has been stickier than they expect and so they're cutting less but
again that's the FED how the FED views the world not how the market views the world if you look at tips implied break evens they just haven't been concerned about inflation for the past few years so from from my perspective this is just you know a Chang in policy expectations oh one other thing of course is uh the FED came out and openly told you that they don't want to cut as much and so the market is is pricing that so other potential stories for what is driving the 10-year yield higher is term premum what
is term premum term Premia is basically the extra compensation investors require in order to hold tenure treasuries above the expected path of fit policy and this is a totally reasonable story as well obviously we have a very large fiscal deficit so maybe people want a higher uh term premium need more risk uh need more compensation to hold that risk now whereas the concept of term premium makes total sense it's a very difficult thing to measure now there are actually studies that do me analysis on term Premia where they you know take out a whole bunch
of term premum models compare their outputs and what they find is that if you have term 10 term premum models you end up with very different uh 10 very different term premum estimates now if the term premium estiment is so model dependent it's hard to see it being very useful a very popular measure of term Premia is the ADM crunt model that's also what people in the FED use a lot and you can just look at this uh graph of the ACM term premum over a few decades to know immediately that it's not useful why
do you know it's not useful because it's not mean reverting so if you if there were many people in the market who made investment decisions according to the ACM model you'd expect term Premia to be mean reverting what that means is that when term Premia is very high these guys would jump in and buy the 10-year yield so so as to make the term premium mean revert to some kind of historical mean and when the term premum is very low or even negative you'd expect these guys to be selling the 10year treasuries until it reverts
until the term premum reverts to some kind of mean where you have more buyers come in but obviously this is not mean reverting it just kind of Trends up and down so I don't think it's useful a more useful measure of turn premum is swap spreads now swaps are the tradable markets expectation of of what a Fed would be over a period of years and what you see is that the spread between treasuries and the swaps and swaps has been widening over the past several months so that does suggest some degree of term premium but
overall it's it's quite small and part of it also has to do with regulatory constraints as well so taking a step back looking at the totality of all this evidence to me it suggests that by far the biggest driver of the rise in tenure yields is the path of fed policy and you can make an argument that there has been somewhat higher term premium somewhat higher inflation expectations but those are just not that important um a related interesting thing is that so because the bond market is global obviously if you have say treasuries in in
the US dollars at 4.75% why would we be buying something yielding Less in another currency so what's been happening in the treasury market has been pulling up Global bond yields whereas you can see this very tight relationship with UK guilts and treasury bonds for example as treasury yields have gone up UK guilt yields have gone up as well so it seems like the the selloff in the treasury market is really pulling up Global yields uh which is really bad news for a lot of them because their economies are just not as strong as the US
economy at the moment so whereas the FED is setting policy in the US looking at stronger than expected us growth stickier US inflation and that is pushing up us yields the US yields are in turn dragging up Global yields and that's going to put a lot of downward pressure on foreign economies so that's something to to pay attention to going forward um there are other narratives that focusing on the UK talking about things like a fiscal crisis and so forth maybe there's a little bit of it but I think the more the clearer explanation is
just that treasur is are rising and causing a global Bond selloff um okay and the next thing I want to talk about is related and that is the stronger than expected strength in the US Labor Market so on Friday we got the all important non-farmers pays report and it headline job creation number just kind of blew expectations out of the water we created 250,000 jobs U last month much much higher than expectations now as we usually do we have to also look into the details and the details were pretty good as well now first off
looking at average hourly earnings tick down a bit so you could think of that as somewhat some degree of weakness but when in the context of inflation that's good news because lower wage growth suggests um downward pressure on Services related inflation but the other really big news was the unemployment rate which tick down to 4.1% now that is a number that the FED is focusing on a lot right fed has become more focused on the unemployment rate its other mandate and with that ticking down to 4.1% uh the market is thinking that the FED is
probably not going to have to cut as much and you see that immediately in the big Bond selloff right after the print now looking at the labor force participation that was pretty steady as well now in addition to the nonfarm perals report last week we also had a couple other employment related datas we have the jolts report that had a know surprisingly to a higher than expected amount of job openings but when you look at it as job openings to to uh workers looking for jobs you notice that it seems to be stabilizing at a
level that's a little bit lower than what the Pand when it was Pep pandemic but stabilizing nonetheless looking at the ism surveys the employment component in the ism Services is um still above 50 again only a little bit above 50 but that's consistent with increased job growth that does to say that Services Industries continue to expand headcounts so overall the labor market seems to be doing okay now if you have this if you zoom out a little bit and look at labor market data over the past year there's this good graph from Bloomberg suggesting that
you know it seems like job growth has stabilized it may potentially have turned a corner again it's still too early to know um but right now so far it seems that the labor market uh is is okay and that means that the FED doesn't have to worry about its employment mandate okay so that's all I prepared for today thanks so much for tuning in and um I'll be back next week for our weekly market update see you all soon
