[00:00:00] Jason Pagoulatos: Hey, everybody. Welcome back to a kind of impromptu market matters session here. A lot has happened since the start of the year. And since the last time we spoke with everybody back in late November, early December, we wanted to kind of jump on the, uh, Jump on the stream, share some charts, kind of give everybody our thoughts on the current market environment, both from a macro perspective and from a more crypto focus perspective.

Since, like I said, a lot is a lot has happened over the last couple weeks. Um, so with that, I will pass it over to Kevin. He will kind of walk us through. Uh, the current macro regime, what’s going on, what’s changed since the December FOMC hawkish rate cut, and we will go from there.

[00:00:48] Kevin Kelly: Yeah, I think, uh, it’s a good time to do this, because there’s plenty going on in both crypto and macro land, and like we know, the two often, uh, intersect with each other, for better or worse.

I think to set the stage, as we headed into 2025, I think one of the biggest potential headwinds was that just about everybody seemed pretty bullish risk. Um, and typically as we know, when you see consensus start to gravitate towards one side of the street versus the other, it doesn’t take a whole bunch to rock the boat.

And so, you know, about two weeks into the year, we’ve already got a bunch of like alarm bells that have started to go off. And so I’ve got a, A few charts I want to show just kind of what I’m seeing, what I think’s going on, and then importantly, we can get into what impact that has and where we think this market’s going.

I think that’s probably what people are most interested in, but you’ve got a bunch of kind of narratives floating around with everything from renewed concerns about re accelerating inflation to soaring bond yields to growing deficit concerns to the stronger dollar that just refuses to bounce back.

break, essentially. You got a recent pullback in global liquidity. All these things have kind of threatened to throw cold water, I would say, on the party and risk markets. And they’ve all seemed to kind of come to a head at the same time. And so, if I bullet it down, I think the two major things that are creating a lot of the madness and kind of excitement right now is the one is the big sell off we’ve seen in global sovereign bond markets.

And the other is a stronger dollar and both are connected in feeding on one another in a certain way. And so, to kind of set the stage, if we remember back to not too long ago, Peak dubbishness for Fed rate cuts, I think, was probably right around the end of September, right? Shortly after, or right around, you know, the September FOMC meeting when they, when we started to see, you know, some pretty considerable cuts.

And the market has gone from uber bullish Fed rate cuts to very conservative really quickly. So three months ago, Fed Funds Futures were pricing in five to six cuts in 2025. Now, if you look at today, you know, it’s pricing in less than two, right? And the, and the timeline for when the next rate cut comes has been pushed out quite considerably.

And so this chart basically just shows, you know, Fed funds futures. You can see this kind of repricing here. And that coincided with the bottoming out in, uh, treasury bond yields, right? Um, specifically longer duration yields, which is really important because, Part of this was kind of, you could say, kick started by renewed inflation concerns, but inflation is not, might be the biggest driving force behind the sell off in, in sovereign debt, um, especially at the longer end, at the end of the curve, right, so longer duration bonds.

As we know, all markets are a function of supply and demand, and the kind of key kicker here is this growing supply demand imbalance that we’re seeing for longer duration treasuries and longer duration global sovereign bonds is really kind of the, at the root of this problem. If we think back again, since the Fed started cutting rates back in September, and you looked at FOMC, Fed Funds Futures, what’s really interesting is that the 10 year yield, right, the nominal yield has actually risen.

At one point was up over 110 basis points. Now it’s roughly 95 basis points since that September FOMC meeting, right? And while inflation expectations have picked up, real yields have moved higher, which basically tells us that It’s not inflation that’s really the primary driving force here. It’s really this growing kind of mismatch between the supply and demand of longer duration treasury debt.

And this, the problem is that this mismatch has the potential to only get worse. The higher yields rise. And especially at a time when we’ve seen the treasury starting to shift, uh, the future plans for new treasury issuance to start issuing more longer term, uh, coupon debt, right? So the long end of the curve.

over T bills, which is a big shift from what we’ve seen in the last 18 months with which very much favored T bills and helped do things like boo liquidity and kept actually a cap on long term bond yields. So why this is important is because rising bond yields means falling bond prices. It means losses for bondholders, but I think more importantly, it also means that it can cause and strains on U.

S. Dow liquidity and starting to really kind of translate into losses for what is the world’s most widely used collateral asset, right? And that’s losing value and starting to pick up volatility. And so concerns now is, okay, going forward is the Fed, or these early signs of the Fed is actually starting to lose control of the treasury market.

What’s also important is this isn’t just a U. S. issue either, right? We’ve seen big sell offs in other major sovereign bond markets like, you know, across Europe, UK, Germany, France, Japan. seemingly just about everywhere. And if you take the UK, for example, I’m showing here, you know, UK, 10 year guilt yields, right?

So essentially the equivalent of 10 year treasuries and the British pound. And what we’ve seen is that 10 year guilts have risen now to, you know, we’re just up at 17 year highs, 30 years, we’re back to 1998 levels and the pound is dropping like a rock, right? So you’ve had some kind of churning around the brutal recalls back to the UK guilt crisis that we talked a bunch about when it happened in late 2022.

But I think the point here is that a lot of the dollar strength recently is also a cause, is being caused by this weakness that is spreading abroad, right, as other foreign currencies basically get devalued against it. And what’s interesting is if, you know, this again is U. S. 10 year real yields versus the dollar, you can see again, we’ve showed this chart before, very, very strong correlation.

And it’s pushed the dollar back towards, you know, two year highs. What’s interesting is if you look at just about every major currency right now is against the dollar, right? There aren’t very many that are actually gaining strength and it goes back to one of the top risks I think we had heading into the new year, which was one of the most notable being if we saw continued strength in the dollar, it could start to squeeze dollar liquidity, tighten financial conditions.

We said that would undoubtedly, you know, weigh on risk markets and at least up until, you know, the last 24 hours, that’s precisely what we’ve basically seen play out. So the sell off in foreign sovereign bonds and foreign FX markets is in part juicing a stronger dollar. And where this gets interesting is the stronger the dollar gets, the higher the risk that foreign holders are going to be forced to actually sell U.

S. treasuries to defend their falling currencies, which only kind of increases the supply demand mismatch, right? It increases the supply at the long end, and it happens at the same time that demand is falling because again, some of these foreign Holders, especially foreign central banks, had to basically think about offloading, you know, US, US treasuries and their, and their foreign assets in order to kind of defend, you know, their currencies against this stronger dollar.

Um, and so that’s the risk is that prolonged US dollar strength leads to faster offloading. Um, and we’ve seen this, we talked about this back in, I think it was the summer, I want to say July, maybe August around what implications this could have if you had a strong dollar, what they could do to the treasury market, and specifically what they could do to foreign demand for longer duration bonds.

And the key here is that foreign central banks are actually a pretty big, they’re not the largest, you know, set of holders of treasuries, but they’re a very key source of demand for specifically longer duration bonds and less kind of liquid parts of the U. S. treasury market. And so what we’re seeing now is basically this, all this kind of come to fruition, right?

If you want to add insult to injury. . We’ve also seen a pretty sizable pullback or contraction, global liquidity. The last couple months. We talked about this, I think in the year ahead. We mentioned global M two had topped out in, in, uh, early October, um, which was being neg negatively impacted by a stronger dollar fed liquidity’s.

Been pretty muted. We’re starting to see early signs of the TJA drawdown that we’ve been, we’ve been looking for and been expecting has really moved the needle terribly, uh, at least yet. And the big kicker being the PBOC, up until again, about 24 hours ago, had withdrawn, you know, almost 500 billion in liquidity over the last three months alone.

And so tighter liquidity conditions, we know, one, weighs on risk markets, weighs on Bitcoin, but also tends to be bullish to U. S. dollar, right? So all these things are kind of coming to fruition at the same time. I think where we go from here is the knock on effects of higher yield, sovereign bond yields, higher treasury yields, stronger U.

S. dollar. It’s causing enough pain that if prolonged, actually will start to spill over into the real economy. You’re starting to see, uh, gold growth forecasts start to get shifted down. Again, expecting this, if this recent strength continues in the dollar and the recent weakness and rising yields continues.

At the same time, it’s kind of undermining foreign U. S. Treasury holders at the exact moment you could argue that the U. S. needs the most, because the Treasury is going to need to roll over, you know, about 10 trillion in the next 12 months, right, and especially at higher yields, that only makes this kind of problem worse.

So this growing supply demand imbalance, I think, especially in the longer duration market, risks this kind of major destabilization event, um, and also just causing further devaluations of, you know, The world’s largest and most popular liquid collateral pools. So, that’s kind of where we are right now,

Page not found

Delphi Oracle

Latest on Delphi