Even the Masters of the Universe Are Stumped

by Robert Burgess, 1/19/23

Bond traders were once deemed so powerful and all-knowing that Tom Wolfe described them as the “Masters of the Universe” in his classic 1987 novel “The Bonfire of the Vanities” that used Wall Street as its backdrop. These days, they look more like deer caught in the headlights.

Those who deal in the fixed-income market are as confused as anyone else over what lies ahead for the economy. That can be seen in JPMorgan Chase & Co.’s weekly survey of bond market participants released on Wednesday. It showed the percentage of respondents who say they are “neutral” rather than “long” or “short” on US Treasury securities — the global benchmarks — has surged to 80%, the most since late 2011 during the height of the European sovereign debt crisis and well above the average of 59% since then. Just 9% expect Treasuries to rally and 11% expect them to decline. In short, bond traders have no conviction.

In their defense, the economic data is sending very mixed signals about the economy. Wednesday’s data are a perfect example. US government data showed retail sales fell in December by the most in a year and that producer prices tumbled by the most since the start of the pandemic in April 2020. So, the takeaway is that consumer spending, which accounts for about two-thirds of the economy, is finally starting to crack and inflation is slowing. Which means a recession is definitely coming and the Federal Reserve can soon stop raising interest rates.

But wait! The Mortgage Bankers Association said its weekly measure of applications to buy a home rose the most since October 2015. And the National Association of Home Builders said its monthly index of builder sentiment rose this month by the most since October 2021. “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023," NAHB Chairman Jerry Konter said in a statement. So, the takeaway is that consumers are feeling pretty good, a recession will be averted, and the Fed will need to press on with its rate increases.

And what about China? Will its exit from Covid Zero policies and its economic re-opening support the global economy but help keep global inflation levels elevated? Or will it ease supply chain snags that were a major contributor to faster inflation? Nobody can say for sure because Chinese consumers are also recovering from a crackdown on private enterprise that’s taken its own toll on the $18 trillion economy.

The confusion is backed up by a surge in implied volatility as measured by the ICE BofA MOVE Index. At a recent level of 122.3, it’s about double the pre-pandemic days. You don’t get these levels of volatility when traders are relatively confident in the outlook.

These are unprecedented times. Too many economists, strategists and investors want to apply rules found in the pre-pandemic playbook, but they no longer apply. The repercussions of an economy that stopped on a dime, shed some 17 million jobs and contracted 31% only to rebound in a flash on the back of free-money government programs are still being felt.

Maybe that’s the real message from the bond market, that predicting where the economy goes from here is a fool’s errand. Fixed-income traders certainly know that better than anyone, having been badly burned the last two years betting that the old forces that worked to keep inflation under control for years would reassert themselves and the big gains in consumer prices would prove transitory.

Bloomberg News provided this article. For more articles like this please visit bloomberg.com.

Even the Masters of the Universe Are Stumped

Sponsored Content

Trending Topics View All

Upcoming Webinars View All