The Bond Market “Paradox”
I don’t remember a lot from the 90’s, but one memory has come back with vivid clarity.
Working with friends and colleagues, who were taking start-up projections and being “conservative” yet completely impossible.
Yes, in their models, users slowed from 200% growth to 50% growth a few years down the road, but their projections still gave them more users than humans within a few years.
That reminds me of legend about grains of rice and a chessboard. According to legend, a ruler asked a servant what they wanted as a reward for some incredible deed. The person asked for one grain of rice to be placed on the first spot on the checkerboard. Two on the second. Four on the third and so on. Doubling the number of grains for each new space on the checkerboard. While that seemed like an absurdly low reward to the ruler, who was probably expecting to be asked to pay his weight in gold (too bad we didn’t have bitcoin back then), but it turns out to be an impossibly large number.
Which brings me to Tesla’s recent price action. Up 12% on Monday, up 7% on Tuesday morning before falling by almost 9% from that level. While at a glance, the percentage moves are on the high side, it is the market cap moves that are simply astounding. 100’s of billions of market cap are being created and sometimes lost, in hours. Even as someone who doesn’t believe in efficient markets, that seems bizarre, at best. According to the WSJ, $16.1 billion of option premium was traded on Monday on Tesla. Which was more than the next 99 most actively traded option tickers combined! What is amazing about that is it includes contracts on S&P and Nasdaq futures and ETFs like SPY and QQQ. I assume they only publish the top 100, so if the value of Tesla option contracts wasn’t more than the value of every other option contract traded on Monday, I’d be surprised.
Whether we are at a blow-off top or not, remains to be seen, but
Those sorts of market cap swings seem inexplicable
Those sorts of option trading volumes seem inexplicable
But since they happened, the inexplicable must be explicable, I just wish I had a good explanation other than it is a gambler’s market and true liquidity, low at the best of times, is being severely tested by gamma squeezes and portfolios need to be hardened against that (or positioned to take advantage).
The Bond Market “Paradox”
We went into more detail on this in Sunday’s “Clear as Mud” but the following seems to be happening:
The market is pricing in the Fed hiking sooner. This is causing yields at the front end to rise. I think it is the wrong thing for the market to do, but I think the headlines will help that trade move along (so I’m betting on something happening that I don’t think should happen, but it is also too early to get in the way of the theme). I continue to believe that the next act in the play of not hiking will be to switch from talking “transitory” to talking “long term averages” but that isn’t the narrative the market is fixated on, at least not yet.
The long end rallies on Fed hikes. The simple narrative would be that the Fed is going to raise rates, which causes bond yields to rise. That is currently not the reaction, as bond investors are sniffing out the potential for the Fed to slow growth too early, or at exactly the wrong time. So fears of a more hawkish fed are driving curves flatter in a “pivot” sort of format (this morning, the pivot point is around 5 years, with bonds less than 5 years to maturity are seeing yields rise, while those longer than 6 years, are seeing yields fall).
Stocks No Longer “Love” Lower Long-Bond Yields. Parts of the stock market that had been positively correlated to bond prices are now “normalizing” and trading as though they are negatively correlated. That makes sense, because if longer dated bond yields are going lower because of fear of the Fed snuffing growth out, it just isn’t good for the market (unlike when yields are going lower because the Fed is buying so much and there is no material threat of sustained inflation).
Longer dated bond yields could benefit from a “risk-off” type of move, which the market seems far less positioned for today, than they were a few weeks ago.
I do miss the 90’s, but those are stories for another day.
Wed, 10/27/2021 – 10:46