Ex-Hedge Fund Portfolio Manager, Full-Time Parent, Data Scientist and Rates Trader
I tend to think about coverage of “Liquidity and the Funding Market” in the same way as “Child Stars of the 90s and the Eurotrash Nightclub Scene”. If they’re making headlines these days, it’s not because things are going well for Liquidity; it’s because they’ve been discovered face-down in a miasmic pool of ever-deepening turpitude & even their best friends are starting to get really, REALLY worried…
The interest rates market is recovering lost ground from last wk’s smoking carnage on the back of a monster move in the oil market over the weekend. It’s important to understand why this matters for rates, especially given current conditions in the bond market.
Two weeks ago, I wrote that the front-end of the interest rates curve was in serious trouble – given that policymakers were keenly aware of their deficiency in handling any selloff; more so than any point I could recall in my two+ decades of Treasury trading.Today, we’ve just witnessed what qualifies as easily the largest 2wk move in the front-end of the Treasury market in 10+ years. So what happened, exactly?
Perhaps you’re wondering, having read breathless press accounts of what to expect from today’s ECB, what a “bazooka” buys you these days in Europe?
Well, Turns Out… A “Bazooka” Ain’t All That It Used to Be.
As August comes to a close, one can’t help but wonder just how dependent risk assets have become on everything from tweets to rebalancing. The biggest form of life-support comes from the Fed: equities are in a world of total dependency.
This isn’t intended as a rant against the practice of diversification – nothing could be further from the truth. But, like all popular investment tools, there’s a mythology that’s been created around modern portfolio theory to suggest a panacea to cure all ills. It’s peddled as a fairy tale that ends with investor & portfolio happily ever after – together on a horse, riding off into the sunset. My argument is that the benefits of diversification depend on having appropriately calibrated priors. And when those priors are dramatically altered, it’s time to reassess – not double-down.