Tuesday 17 March 2015

Credit - Zugzwang

"I have with me two gods, Persuasion and Compulsion." - Themistocles

Watching with interest the escalating tensions between Greece and Germany while a payment was made in favor of "special creditor" IMF, we reminded ourselves, for this week's analogy in our chosen title of a situation called Zugzwang (German for "compulsion to move") found in chess and other games given Greek Finance minister Yanis Varoufakis is an expert in game theory. We found it of special interest because in German chess literature, one player is put at a disadvantage because he must make a move when he would prefer to pass and not to move. The fact that the player is compelled to move means that his position will become significantly weaker. The term is also used in combinatorial game theory, where it means that it directly changes the outcome of the game from a win to a loss. Positions with "zugzwang" occur fairly often in chess endgames, a topic we have discussed in a previous chess analogy surrounding European woes in our conversation "The Game of The Century" where we discussed at the time the great chess master abilities of German Chancellor Angela Merkel :
"By managing to keep Germany’s liabilities unchanged Angela Merkel appears to us as the winner of the latest European summit (number 19...). Question being for us now, can Europe survive in the current form (number of countries) without making material sacrifices in true Bobby Fischer fashion? One has to wonder." - Macronomics, July 2012
As we indicated in our conversation "Eastern promises" on the 9th of June 2012, we think we are clearly approaching the end of the great European "chess" game and ultimately the only possible Nash equilibrium for Germany will be to defect:
"We think the breakup of the European Union could be triggered by Germany, in similar fashion to the demise of the 15 State-Ruble zone in 1994 which was triggered by Russia, its most powerful member which could lead to a smaller European zone. It has been our thoughts which we previously expressed."

The ability to play these endgames well is a major factor distinguishing "masters" from "amateurs". In what was labeled "The Game of the Century" and in reference to our previous 2012 chosen title, Bobby Fischer 13 years old at the time, won the game against Donald Byrne, one of the leading American chess masters, by making material sacrifices at the time. 

On a side note and in continuation to our previous chess reference, the same Bobby Fischer used "Zugzwang" twice against Mark Taimanov in 1971 in the World Championships Candidates match. Mark Taimonov was crushed and lost 6 to zero to Bobby Fischer. The Soviet government was deeply embarrassed, and found it "unthinkable" that he could have lost the match so badly to an American without a "political explanation". In response, Soviet officials took away Taimanov's salary and no longer allowed him to travel overseas. The Soviet government later "forgave" Taimanov, and lifted the sanctions against him following Fischer's 6–0 later win the same year against Danish Bent Larsen known for his "unorthodox" style of play,  which paved the way for Bobby Fischer's achievement in reaching the first World Chess Federation (FIDE) number-one-ranked player. Bobby Fischer held the number one slot for 54 months. Maybe Greek Finance minister Yanis Varoufakis will suffer the same "orthodox" measures than Mark Taimanov, in the short term but we ramble again...

In this week's conversation we will look at France, as from our point of view, it continues to be for us as the new barometer for Euro Risk. We will also continue look at the US earnings picture, which appears to us more and more vulnerable to setbacks thanks to a rapid rising US dollar.

  • France appears to us as the weakest link in Europe at the moment
  • Being "short" Euro is one of the most crowded trade
  • Europe continues to be a "flow" driven market
  • King Dollar even rules the Fed
  • Final note "There is an anomaly in US share prices and UST yields"

  • France appears to us as the weakest link in Europe at the moment
French politicians are benefiting from low rates on French debt issuance courtesy of on-going "japanification", but, on the economic and political front, France is showing increasing signs of growing stress as pointed out in our last conversation "China syndrome":
"Given France has now postponed any chance of meaningful structural reforms until 2017 with the complicity of the Europe Commission, (again a complete sign of lack of credibility while imposing harsh austerity measures on others), and that the government will face an electoral onslaught in the upcoming local elections which will see yet another significant progress of the French National Front, we are convinced the"Current European equation" will breed more instability and not the safer road longer term."
When it comes to complete credibility failure we have to agree with Louis Capital Market's Cross Asset Strategy note from the 9th of March entitled "Will China Resist America Pressure?" in relation to France's incapacity to reform:
"Last week In France we were amused to hear Pierre Moscovici of the European commission explaining to France that the economic policies implemented up to now were not of a satisfactory or adequate quality. The irony is not lost on us. Moscovici was still France’s Minister of Finance four months ago and a man in charge of deciding and implementing the country’s economic and budget policies. To see four months on telling his ex-boss that policies he most probably was involved in are inadequate is simply farcical.
Finance was promoted to head the world economic decision centre and to explain to countries what kind of reforms they should implement or what kind of macroeconomic policies they should run. In France, the nomination of Christine Lagarde as head of the IMF was seen as another farce.
It is striking to see these days the incapacity of France to adjust its economic policy, and in particular its fiscal policy. The charts below are impressive because they show that in Spain public expenditures have adjusted to the new economic reality of the country whilst in France, the public spending trajectory has not adjusted at all.
The chart below is crystal-clear: the pace of growth of public spending is intact! France and Germany are insistent upon the Greek government to maintain its previously defined fiscal consolidation objective. Yet, France has shown its incapacity to enter any fiscal consolidation. It is a shame to see the lack of effort on the expenditure side in France. However, this subject is of little importance, because confidence is so high in financial markets and because the ECB is financing states for free. The reality is that the ECB refuse to consider that they finance governments – however their actions give them away. With its government bond purchases, the ECB has ensured a low financing cost to investment grade countries, no matter what decision is taken on the budgetary front. The Germans were against QE, because they considered it to be an act similar to lending money for free without counterparties to secure risk. To put it simply their reasoning is true.
France will be the only important country in Europe to see a deterioration of its budget deficit in 2015 compared to 2013. It seems that the French government is betting on the economic recovery to get a cyclical rebound of its revenue that will prevent it from making the painful adjustment on the spending side. The opportunity for France clearly lies in its access to a very low financing cost for its public debt that – mechanically – will lower also its debt service in the budget.
Francois Hollande can send his thanks to Mr Draghi as the current context offers significant opportunities for France. French civil servants would have never accepted a decline in their remuneration as was seen in Southern Europe. These painful decisions have been avoided in France and the government is now ready to boast about the cyclical upswing France is enjoying. Such events leave us speechless." - source Louis Capital Markets
Of course the reason why French civil servants would have never accepted a decline in their remuneration is fairly simple to assess. It is the only support left to French president François Hollande! With only 25% of approval rate, there is indeed a large contingent of public servants still supporting the French president as they represent 22% of the working population versus 11% only in Germany. Please also note that 44% of the French National Assembly is made of public servants which explains the lack of "willingness" in implementing "structural reforms and only 3% of businessmen. In the UK you only find 9% of public servants in the House of Commons and 25% are businessmen. The big difference between the United Kingdom and France is that, in the United Kingdom, the particular problem of public servant eligibility was dealt with an absolute ban by the House of Commons Disqualification Act of 1975 and it was justified on the basis that civil servants should keep their political views a private matter. To do otherwise was deemed to impugn the neutrality of the British public service and its ability to serve government of whatever political persuasion. Civil servants therefore are required in the United Kingdom to resign before announcing their candidature. In France, put it simply, with their "bulletproof" status, they never lose, but, that's another matter...

On that particular point around the impossibility of major reforms, we read with interest Bank of America Merrill Lynch's note on France written by their European Economist Gilles Moec published on the 16th of March and entitled "France: doing more than it seems, but less than is needed":
"Tough fiscal and political equation
For this to be neutral for the fiscal balance, we think such a move should be offset by a reduction in public spending. Actually, Paris needs to do more than a mere offset, since the European institutions are still demanding a net fiscal tightening, in our view. This is where the political rigidities of the French centre-left kick in. Although the current administration has clearly embraced a reformist course, and is ready to confront its increasingly restive left wing minority in parliament, this imposes limits to the government’s room for manoeuvre. The administration needs to carefully choose its battles. The government can - and will - slow down spending, but changing the very structures of the public is out of reach in our view.
Cycle to help
Fortunately, a series of external factors are making the government’s job easier. The drop in oil prices will support consumer spending – which has already showed sign of recovery in the last few months. The decline in the exchange rate of the euro will be a major boost for growth, since the particular sensitivity of French exports to currency gyrations offset the low share of foreign trade in GDP. Still, while this should help keeping Paris on the right side of the European rules, we expect only peripheral progress on structural issues." source Bank of America Merrill Lynch
For the reasons stated above, we have to agree, changing the very structure in public spending is clearly out of reach. The game is not only locked but, it is rigged and the burden of taking France out of the proverbial doldrums has been put on the corporate sector. The issue of course is that the French corporate sector boasts a low and declining profitability thanks to important labor cost as indicated in Bank of America Merrill Lynch's note:
"Faced with low and declining profitability, firms have to choose between three solutions. First, run down headcounts and/or pay until the share of profits in value added is restored. Second, cut down on capital expenditure. Third, maintain headcounts/pay, and capex at the cost of higher debt. In the short run, the third solution is from a collective point of view the best one, since it is the only one which is consistent with some protection of aggregate demand (unless fiscal policy can offset the lack of private demand, at the cost of higher public debt), but obviously this is feasible only if interest rates are sufficiently low and banks have enough appetite to lend. Such option was not open in Spain for instance, where the initial level of corporate debt was high, interest rates were very high on account of the sovereign crisis and banks were not in position to lend. A “crash adjustment” of profitability was the only option (Chart 1)
Among the four largest economies of the Euro area, France is the only country where the investment rate of the non-financial corporate sector in 2008-2014 has exceeded the level of 1999-2007 (Table 2). 
Moreover, the investment effort exceeded gross saving, which is a broader measure of profitability, taking into account the impact of net interest and tax. In 2014, investment exceeded saving by 30% (from 11% in 1999-2007), while in Germany and Spain investment was lower than gross saving (in other words the corporate sector there is in a net lending position) and in Italy recourse to external funding fell (Table 3).
This reflects the resilience of the French banking sector throughout the crisis which was able to meet the demand for credit from the firms. Since Q1 2013, corporate debt as a percentage of corporate output has been is higher in France than in Spain (Chart 2). 
In Q3 2014, the ratio stands at 249% in France, very close to the peak level it had reached in Spain (251% in 2009).
This level of corporate debt is however much more sustainable in France than it ever was in Spain. While in the periphery market rates, and bank interest rates margins shot up during the crisis, imposing a major burden on firms when refinancing their debt, in France the banking sector consented to a major drop in lending rates, while the sovereign bond market was likely never seriously under attack (Chart 3). 
This means that, in spite of the significant increase in the stock of debt, net interest payments have been falling. In Q3 2014, net interests stood at only 4.2% of gross operating surplus, significantly below Spain (Chart 4).

Is there a "zombification risk"?
Still, this can’t be a sustainable growth model, for three reasons. First, even if with QE is ECB has become very credible on the “low for long” interest rates policy stance, interest rates cannot remain below equilibrium in France forever.
Second, companies cannot likely maintain a decent level of capex if their expected profitability does not recover at some point. Third, cheap credit can trigger a process of “zombification” of the corporate sector by keeping fundamentally unsound businesses alive, which down the road would damage growth potential by keeping resources skewed towards the least productive sectors.
In France the number of corporate bankruptcies never exceeded the 1993 peak. This contrasts with the explosion in corporate failures seen in Spain (Chart 5 and Chart 6). 

One could find comfort in the fact that the pace of business failure is in line with the position in the cycle, but this could be a case of reverse causality: the reason why the French output gap is not deeper could simply come from the fact that businesses are allowed to survive by an overly complacent banking sector.
However, since the French productivity performance has been decent lately - when compared with Germany - we think that the high survival rate of French companies has not yet impacted overall economic performance, but it's a risk for the future."  - source Bank of America Merrill Lynch
While the corporate sector has been clearly preserved compared to Spain from lower leverage and a lesser credit crunch, the corporate sector, in our views cannot continue to do the "heavy lifting" when public expenses continue to represent around 58% of GDP. Furthermore as it can be seen in Chart 2 from Bank of America Merrill Lynch, the French Corporate debt over corporate output has been steadily increasing and is now above Spain which has been rapidly deleveraging during the last few years.

The political issue of course is that in the incoming elections, the French socialist party is facing serious bashing and as we mentioned before, it's only support comes from the public sector employees as also underlined by Bank of America Merrill Lynch's note:
"This gradualist approach – which generates a pervasive sense in the foreign commentariat that “France is not doing anything” – reflects in our view the fact that i) the current administration campaigned in 2012 on a rejection of Sarkozy’s stance, seen as “too brutal” and ii) an increasingly restive traditionalist left wing of the socialist party imposes limits to the reforms.
Indeed, a peculiarity of the socialist party is that the core of its support does not come from the working class employed in the private sector (which has been increasingly deserting the left for the National Front) but public sector employees.
This puts a limit to how far the government can go in any structural overhaul of how the state operates, while the reformist turnaround of Hollande has created a wedge in the socialist party's parliamentary group.
The fairly limited deregulation offered by the “loi Macron” was forced through parliament thanks to the 49.3 procedure, which explicitly links the passing of a bill to the survival of the government. The left wing of the socialist party had no choice but to support the government on this, to avoid early elections in which they would probably have been wiped out.
The 49.3 procedure can be used only once in each parliamentary session (although the budget bill is excluded from this limit, which means that the government can almost certainly get a budget through). This means that the government must now choose its battles carefully" - source Bank of America Merrill Lynch
While the international scene is watching with caution the rise of the French National Front, the political story, we think is the slow dislocation of the unity of the left. Statistically speaking, what has been rising is more the number of non-voters (around 60%), rather than the "absolute" number of people voting for the National Front.

But, let's move back to France and its "micro-economic" picture. In our conversation "The European crisis: The Greatest Show on Earth", we indicated:
"When it comes to credit conditions in Europe, not only do we closely monitor the ECB lending surveys, we also monitor on a monthly basis the “Association Française des Trésoriers d’Entreprise” (French Corporate Treasurers Association) surveys."
One particular important indicator we follow is the rise in Terms of Payment as reported by French corporate treasurers. The latest survey published on the 13th of March points to a deterioration in the Terms of Payments, which indicates that the improving trend since mid 2012 has turned decisively negative:
The monthly question asked to French Corporate Treasurers is as follows:
Do the delays in receiving payments from your clients tend to fall, remain stable or rise?

Delays in "Terms of Payment" as indicated in their March survey have reported an increase by corporate treasurers. Overall +17.9% of corporate treasurers reported an increase compared to the previous month (+13.9%), bringing it back to the level reached in October 2014 (17.9%). The record in 2008 was 40%.

Overall, according to the same monthly survey from the AFTE, large French corporate treasurers indicated that they are still facing an increase in delays in getting paid by their clients. It is therefore not a surprise to see that the overall cash position of French Corporate Treasurers which had been on an improving trend since 2011 has now turned more negative overall according to the survey:
The monthly question asked to French Corporate Treasurers is as follows:
"Is your overall cash position compared to last month falling, remains stable or rising?"
Whereas the balance for positive opinions was 17.9% in November 2014 and still at 6.3% in January 2015, February saw it dip to -5.2% and March's provisional figure came at -8.5%. 

This warrants significant monitoring in the coming months we think from a "corporate monitoring health" perspective.

  • Being "short" Euro is one of the most crowded trade
According to Nomura's FX Positioning Index from the 13th of March, short Euro positioning is still close to record high of November but, looks like it close to stabilising: 
"EUR positioning was little changed the week ended Tuesday, falling just $0.1bn. Since then, specs have sold a further $1.7bn. Positioning is estimated currently at -$25.9bn which is still shy of the lows from November (-$28.1bn) and February (-$28.2bn)."
 - source Nomura
The very significant rapid depreciation of the Euro in conjunction with record low yields are for us clearly signs of the on-going "japanification" process at play in Europe and validates our deflationary bias. But, in terms of risk reversal for the Euro, there could be a pause depending on the FOMC outcome we think.   

In terms of bond yields as well we are getting closer to some floor in Europe (except for Greece...). On that specific "bond" matter we agree with Louis Capital Markets take:
"We have been OW bonds for a while, but would be back to a neutral position because the upside/downside likelihood appears more balanced now. As Mr Weidmann from the ECB said, if the implementation of QE by the ECB is a success, nominal bond yields will increase in the end. This is indeed our conviction and the charts below explain the reasons why.
The green line above should creep higher as inflation expectations normalise. Indeed, the above chart on the right shows that current real yields (extracted from long term inflation linked bonds) are extremely low in Europe (well below the level reached by US inflation linked bonds during QE3). There should, therefore, be a limit to the downside of real rates in Europe which in the end implies a limit to the downside of nominal bond yields in Europe.
We would also like to add to what Mr Weidmann said that if QE is successful, bonds yields should rise AND the euro should stabilise or rise.
This is the contradiction that is emerging these days among investors: if investors continue to be short on the euro, they cannot continue buying European equities, because if the euro continues to decline it will reflect the failure of QE and will validate a deflationary scenario for Europe.
Therefore, the next phase is to see the stabilisation of the euro to validate the recovery of the growth expectations in Europe." - source Louis Capital Markets
When it comes to the success of QE in Europe, as we have stated before, QE without additional policies is bound to fail. 
While from a flow perspective we believe in short term stabilization of the Euro, we agree that the continuation of the decline of the Euro will indeed ultimately reflect the failure of QE and the deflationary scenario playing out in Europe à la Japan.

  • Europe continues to be a "flow" driven market
As far as European equities are concerned, it is indeed a flow driven market which has seen strong foreign investments, particularly by Japanese investors as indicated by Nomura in their JPY Intraday Comment from the 12th of March entitled "Strong foreign equity buying continues":
"Strong foreign equity buying continues
Japanese investors continued to purchase foreign assets at a high pace last week.
They bought JPY356bn ($3.0bn) of foreign equities, for the sixteenth week in a row, while purchasing JPY270bn ($2.3bn) of foreign bonds, for the seventh consecutive week
(Figure 1).

Foreign equity investment flows remain strong, with net purchases of over
JPY1trn per month
(Figure 2). 
Japanese investors purchased JPY1384bn ($11.5bn) of foreign equities in February, more than JPY1trn for the third consecutive month . The record pace of Japanese investment in foreign equities continues so far in March. Pension funds and retail investors were two major net buyers of foreign equities recently, and we expect them to remain strong net buyers of foreign equities as public pension funds shift their portfolios from JGBs and better economic conditions support risk sentiment among retail investors. Strong foreign equity investment by Japanese investors should support USD/JPY this year.
Foreign bond investment has also been relatively strong, while February’s MOFdata showed that banks were major buyers of foreign bonds. Their foreign bond investment likely involved smaller FX transactions than other investor types. Pension funds and toshin companies were also likely small net buyers of foreign bonds, while life insurance companies may still be quiet ahead of fiscal year-end. Life insurance companies sold foreign bonds in February for the first time in two months, albeit a small amount." - source Nomura
The Ides of March...or when Japanese investors are "Zugzwang" (compelled to invest) before the end of the fiscal year (31st of March).

According to Nomura's report,  there was net buying of JPY31bn (USD255mn) in foreign currency denominated toshins on 10 March, according to NRI, the 56th consecutive business day of net purchases. We continue to closely look at Japanese flows when it comes to their European appetite.

  • King Dollar even rules the Fed
Meanwhile the USD crowd remains near record high according to Nomura's FX Positioning Index from the 13th of March:
"According to the IMM data for the week ended March 10, non-commercial accounts increased their USD longs by $3.9bn. Our real time indicator suggests net longs increased by a further $1.2bn since. Net longs stood at $52.8bn by Tuesday and had increased to $54.0bn by Friday’s close, just shy of the all-time high of $55.6bn set the second week of January." 
- source Nomura
We do not believe in a June hike by the Fed and are adamant the Fed will remain rather dovish in the light of recent data disappointments regardless of the strong NFP data recently released. We are therefore content with our current long duration exposure which we added on recently.

On that point we agree with Nomura's latest take from their 13th of March note entitled "Fed - behind the curve or just right?":
"Cross Rates View
The start of the ECB bond-buying spree this week resulted in a further push to historical low yields in Germany, with Bunds breaking through the 20 bps barrier. Almost like clockwork, the UST auctions went over well as the overall EU curve flattening helped reverse the NFP-led selloff. Heading into FOMC next week, it will be another meeting in which they guide the market’s expectations that hiking will happen only when all factors give them enough confidence to do so later this year. The market has had a tendency recently to go into FOMC/Minutes expecting a hawkish event only to be let down. We think the recent reaction to such Fed events will be repeated next week, with the market adding to hedges ahead of time and unwinding them during the presser." - source Nomura
King Dollar: One currency to rule them all, even the Fed!
"Pace: Faster hikes should be self-restrained by an increasingly stronger USD
So far the pricing for a June hike has been a lot more uncertain compared with the 2004 cycle (Fig. 5),  and the Fed’s hiking pace is even more difficult to pinpoint—it should be anything but the well-telegraphed 25bp per meeting schedule we saw back in 2004. 

One key driver this time around is the total dichotomy of global monetary policy, wherein the Fed is about to embark on a hiking path, while the second-largest economic bloc, i.e., the Eurozone, has just started its easing program, while the BoJ is still in QQE. As a result, the FX adjustment is going to have a much more pronounced impact (Fig. 6) on both the financial markets and the U.S. economy. 

We are already seeing equity markets under a bit of pressure as the stronger dollar eats into corporate profits, especially given the heavy weighting of multinationals in the broader indices. As the effects of a stronger dollar trickle down to worsening trade and softer inflation prints, we expect the Fed to be very gentle, as a faster hike pace will have a compounded effect via FX tightening."
Terminal Rate – Higher debt loads call for a terminal rate much lower than before
The business cycle/equity rally is long in the tooth; and with other central banks easing while taper and the dollar act as tightening forces, the terminal rate will end up lower than in the past. The Fed has been ratcheting down terminal expectations (from 4.25% to 3.75%), but we believe that in the upcoming meetings it will avoid lowering this as much as the other dots. Instead we see it focusing more on lowering the dots in 2015 and 2016, because it doesn’t want to admit defeat just yet. Meanwhile, our Economics Team believes the terminal level will be closer to 3% when the Fed finishes tightening in this cycle, largely due to the dollar, as noted above (see link). We stated that the Fed will be lucky to get to 2-2.5% when all is said and done, largely because ratcheting up aggregate demand while performing debt deleveraging requires years of low real rates." - source Nomura
The large global debt overhang requires much smoother maneuvering from the Fed thanks to King Dollar although the Fed feels it needs "Zugzwang" due to latest employment data.

On the dichotomy between Economists' perception and consumers' reality we completely agree with Reorient Group David Goldman's take in their note from the 15th of March entitled "It's all about the dollar...even for the Fed":
"The fact is that consumer behavior with respect to gasoline purchases is not much different than with respect to other items in the consumption basket. The chart below shows year-on-year change in nominal purchases of all goods (excluding food services) and gasoline. The two lines have the identical shape; the only difference is that the absolute change in gasoline sales is much greater, reflecting the volatility of the gasoline price. Evidently American consumers do not feel as confident about the employment outlook as the economists. We observed last week that most of the new jobs created during the employment bounce of the past three months were in low-wage, labor-intensive industries (health care, hospitality, and retail), which explains why wage growth has been absent.

We have never been enthusiastic about quantitative easing: the drag on the US economy is regulatory and fiscal rather than monetary, and the Federal Reserve has had the unenviable task of promoting growth against these headwinds. But the prevailing view at the Fed that an economic rebound justifies higher rates—seemingly among the whole Board of Governors except for Chair Janet Yellen—is inconsistent with the data. The bond market has remained skeptical. The present 10-year Treasury yield of just over 2% reflects lower inflation expectations, consistent with falling commodities prices, and a modestly higher “real” rate (the yield on inflation-indexed securities)." - source Reorient Group, David Goldman
While the Board of Governors of the Fed might feel the "Zugzwang" urge, we remind ourselves that the fact that these players feel compelled to move means that their position will ultimately become significantly weaker. If their head prevails, at the FOMC, they will remain on hold and delay hiking interest rates in June until further data validates the "Zugzwang" we think.

  • Final note "There is an anomaly in US share prices and UST yields"
Like many pundits, we believe the velocity of the rise in King Dollar represents a significant headwind for US corporate earnings and yet another important factor for the eager to trigger "Zugzwang" Fed. In that instance we read with interest Nomura's Japan Navigator comments from the 16th of March. US corporate earnings in April will be essential to watch!
"Concerns over US corporate earnings reports in April
Since last summer, we have been pointing out the anomaly in US share prices and UST yields that appeared at the start of the quarter, which remains in place (Figure 3). 
 This anomaly is: 1) overvalued stock prices correct before earnings season starts, which has been typical in recent quarters; and, 2) The Fed conducts policy based on its communications with the market, and adjusts its hawkishness depending on stock market conditions, which also drives movements in rates markets. Currently, the impact from strong USD on corporate earnings is a key theme, which should increase investor concerns over earnings announcements.
We believe the Fed will remove the “patient” wording in its next statement, but this alone is unlikely to change rate hike expectations. However, as this would means the Fed is maintaining its hawkish stance, investor risk sentiment should then deteriorate into next month’s corporate earnings reports.
Given this, it is worth considering a risk scenario in which the Fed sends an unexpectedly dovish message at its next meeting. While this would likely prompt bond yields to fall, risk sentiment could improve, laying the groundwork for higher share prices and bond yields in April-June.
In either case, this would not trigger the next upturn in yields, unless US economic indicators surprise on the upside." - source Nomura

So "bad news" (rate hike) could end up being good news for US Long bond holders like ourselves (holding pattern). After all that's exactly what we pointed out in the first bullet point of our conversation "Information cascade":
"Under a dovish monetary global policy, both stock and bond markets will strengthen concurrently." - source Macronomics, 8th of March 2015

"What makes zugzwang such a painful death is that the deceased is executed not by a threat but by his own suicide" - Andrew Eden Soltis, American chess grandmaster.

Stay tuned!

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