Bye bye commodity “supercycle”

It was a good time if not a long time. Nordea:

Markets almost never cease to amaze. Just as we had written at ext pondering the doomsday spiral between commodity prices and inflation fears, the fixed income market got spooked enough so as to start triggering unwinds of various reflation trades. When the US10y yield broke above 1.45%(a level around which the yield had bottomed in 2012 and 2016), risk sentiment dumped on Thursday, EM got hit and the CHF started to strengthen. We had earlier speculated in at a per tantrum event in Q2, but as with all things these days, history seems to be accelerating. In the near-term, we might get more unwinds of popular reflation trades, implying downside risks for eg EMFX and upside risks for currencies such as CHF and JPY.

In the bigger picture though, the macro case for believing in higher yields remains intact (the growth and inflation outlook…), and there’s also the supply story (Biden’s bombing budget) as well as a technical story with regards to the Fed’s SLR relief that also suggest headwinds for fixed income. Perhaps Powell will provide details on the SLR in his speech this coming Thursday. That would help cool down the craziness in fixed income, at least temporarily. The exemption on Treasuries in leverage ratios matures 31st of March, unless authorities opt to prolong it, and we silently warn that there is a clear reverse relationship between USD reserves (which will increase markedly) and primary dealer positions in Treasuries, when this exemption is not in place. There is nothing as permanent as a temporary program as Friedman famously put it, but the Fed will likely have to re-arm this to markets to prevent a further disorderly market environment in Treasuries.