Macro Views & Flows : Still Uncertain, No Clear Trend

Interest rates

From the people who spend their entire day just looking at 1 product.

Keep an eye on the bid/covers of US auctions for a guide to where yields are heading.  Recently they have been falling across the curve – but most of this is still concentrated in the front end as the Fed tapering continues to be priced in. 

In the 2-year auction on Tuesday it fell to 3.08, from 3.77 in January. The 5-year yesterday remained at 2.45, the weakest since 2009 (Chart 1). Outside of the bid to cover ratio, outright demand for treasuries is shifting heavily from the primarily dealers and direct bidders to indirect bidders – which is the category Central Banks occupy. Typically, indirect bidders are the buyers of last resort, and weak primary demand illustrates the secondary market is gearing for a sell off. The bottom line is several auction results are signalling increasingly less demand for UST – and is independent of tapering, better data or US risk is driving it. However, it is going to drive yields higher, and will help the long USD positions able to remain in the market.” Source : Citibank

Rates are going up, it is an eventuality.


“Although the trend of outflows continues in both local and hard currency funds – the pace has noticeably slowed in local currency funds (second lowest figure since the start of outflows in June), while the intensity has increased in hard currency funds…..
HY bond funds saw continued strong inflows this week too (USD 5,393mn). Flows into US bond and global bond funds saw some stabilisation after last week…
EM equities saw a second week of some stabilisation in flows with USD 907mn inflows the week ending July 24th.  In DM, we saw consistent inflows across all major regions. US funds registered lower inflows this week (after a record USD 17.4bn inflows last week) of USD 4.7bn (0.1% of AUM), Japan country-funds saw an intake of USD 576mn (+0.3% of AUM), and Western European funds absorbed a net USD 1.6bn (+0.2% of assets).” Source : Citibank


For the month end…

  • July has been a good month for investors, especially in equities, which could lead to a larger than average global rotation out of stocks and into bonds over the last week of the month.
  • The largest contributor to these flows should be the US, though the UK and Japan could also experience significant flows both into bonds and out of equities.
  • The FX impact of hedge rebalancing points to USD selling, especially against the EUR

Source : Citibank

It does look like Zico is right not to waste time on Singapore or regional equities anymore even though he will be looking to load up more Tencent soon. Developed markets are the way to go for the medium term.


July 26 (Bloomberg) — Local-government financing vehicles
need to repay a record amount of debt this year, prompting
Moody’s Investors Service to warn Premier Li Keqiang may set an
example by allowing China’s first onshore bond default.

July 26 (Bloomberg) — Argentina’s soaring imports of oil
and gas are reducing the trade surplus to the smallest since its
default in 2001, exacerbating the strain on foreign reserves the
nation uses to pay bondholders.

July 26 (Bloomberg) — Philippine seven-year sovereign
bonds headed for a fourth weekly gain and the peso climbed after
Moody’s Investors Service placed the nation’s credit rating on
review for a possible upgrade.

More uncertainty ahead. Institutional sellers out of hedge funds and fund managers in Chinese high yield property but finding PB customers on the bid. Here is an interesting article around the Barclay’s Skyscrapper Index and how each of them predicted a financial crisis.

China’s Sky City is yet to be built and its fate is hanging in the air, just like all of ours.