Expanding money supply bearish for bonds: tactical short

9 thg 4, 2020

The USD's status as a reserve currency comes back to bite the Fed once again. Widespread liquidity shortages in credit markets mean institutions, foreign central banks, and emerging markets with USD-denominated debt are selling everything that is not cash in a frenzy to raise USDs. Until recently, the Fed hadn't been able to keep pace with demand, resulting in severe volatility in the currency and rates markets.

In the past week, a swath of USD liquidity programs were implemented by the fed. FX swap lines, quantitative easing, and monetized deficit spending have added trillions of dollars in liquidity at a time when it is sorely needed. At the same time, we've started to see the light at the end of the tunnel for various disinflationary threats. New COVID infections in US coastal cities are showing signs of peaking, and those cities are likely to start opening up through May. Stimulus checks will reach bank accounts and then the economy. OPEC instituted supply cuts, and many non-OPEC oil majors have slashed capital spending. All this sets the stage for an oil supply crunch and reflationary second half of 2020.

Recommendation: Overweight international equities and equities which derive most of their revenue in currencies other than the US dollar. Short TLT, with an initial target of 160 on June 1st.