Hi YXI friends,

I’ve wanted to put together this report for a while. After we dive deeply into single topics (Yield Curves, TLT, Bitcoin, MSFT), we can now start tracking them.

Please feel free to comment / use the poll / chat on Slack to make any changes or additions you’d like to see.

Lets get started!

Included in this report - you can click on the link to fast-forward (browser only):

1. The Bigger Picture

2. Yield Curves

3. Treasury ETFs: TLT, TLH

4. Treasury General Account as a liquidity indicator

5. Equity ETF performance, highlighting XLF

6. Megacaps: TSLA, GOOGL, MSFT charts

7. Bitcoin

8. Gold (to be included in the future)

9. Economic Calendar

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. The Big Picture

The overall regime we are in is a macro-driven risk-on, risk-off pendulum. There have been two main interlinked narratives driving the current market reactions:

1. The Bank of Japan raising rates, busting the JPY carry trade

2. US Recessionary concerns driving larger Fed cuts

A very quick explanation: the JPY carry trade is when investors borrow JPY at a very low interest rate in Japan, exchange it into USD, buy US Treasuries or risk assets (e.g. Magnificent 7 stocks), and may or may not hedge the FX using an FX swap.

This trade is lucrative as long as the Japanese interest rate stays low, and US interest rates (to receive a high yield on Treasuries) or risk assets stay high. If the FX is unhedged, investors can further benefit from a rising USD versus JPY. This carry trade not only works for JPY but other low interest-rate currencies.

However, now looks at this chart - the US vs Japan 10Y bond yield spread versus the QQQ and USDJPY.

The US10Y vs JP10Y spread narrowed from 3.41% in early July to 2.84% after Friday’s nonfarm payrolls, as Japan hiked interest rates and the US rates rallied on recessionary concerns (bond prices higher, yields lower).

This had two effects: the rise in JPY yields pushed up the cost of funding in JPY while simultaneously pushed down the USDJPY exchange rate. Not only are the carry traders facing less returns and higher cost, but also lost money on the FX leg. Moreover, US Treasuries become less appealing for them as yields fall. The overall impact is that the JPY carry traders are being squeezed, having to unwound if leveraged.

Aside from the carry trade unwinding, the US stock market has been in a risk-on, risk-off frenzy, as reflected in stocks rising and falling with bond yields. When the market is risk-off, investors dump their risk assets (equities) in exchange for risk-free assets (bonds). Higher bond prices push the yields down.

Has the dust settled?

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