Latest macro developments are positive to the Kekselias portfolio’s 5s30s yield curve steepener (wider curve spread between 5 and 30-year rates):

• A dovish Fed focused on “risk management” and providing “policy insurance” to counter macro uncertainties would look-through inflation rebound (firmer CPI and PPI), thus anchoring short-term rates and depress policy risk premium across 2 to 5-year part of the yield curve
• At the same time, absence of policy anchor on long-term rates (thus far) would see investors selling long-term bonds amid firming price pressure. If inflation rises further, institutions willing to warehouse interest rate risks over long horizons would demand greater price concession to push up yields (term premium)

Under this premise, two ends of the yield curve would face divergent market catalysts and pivot around the 7 to 10-year point, thus steepening the curve. This is net bearish to risk assets, for long-term real rates are risk asset discount rates. If risk assets decline, rate cut expectations would rise further to push front-end rates lower.

Revenge of the curve steepener

Recall it was only 8 months ago when mainstream financial media outlets proclaimed 3 to 4 rate hikes this year, and many investors scrambled to one-up each other on how negative the yield curve would trade (5s30s briefly traded at 19 bps). Kekselias’ argument for less rate hikes (therefore steeper curve) saw virtually no interest from several Asia-based institutional investors. It is great to be vindicated.

The steepening of the 5s30s yield curve is partially responsible for the rebound in portfolio returns, with the other being short USDJPY and long 2-year notes (already unwound):

(Disclaimer: this should not be taken as investment advise. Leveraged positions are not suitable for most retail investors, and one institution’s risk tolerance can differ greatly from another. This is only to show how brittle market sentiments can be, and how mainstream financial media are trend followers rather than at the vanguard of institutional flows)