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BespokePremium.com © Copyright 2020, Bespoke Investment Group, LLC. Bespoke Investment Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.
Crowded EM, Deficit DM With various fiscal easing packages around the
world being offered up to meet the needs of
battered populations and stressed supply
chains, global fiscal deficits will soar in 2020.
Across a sample of 23 developed and emerging
markets accounting for 85% of global output,
the US stands out at a forecasted fiscal balance
of –12.6% of GDP, with South Africa (-11.3%),
Brazil (-10.9%), and the UK (-9.3%) also notable.
Norway is actually going to run a 3% surplus
despite weak oil revenues, while the Czech Re-
public (-1.0%) and Switzerland (-1.7%) also run-
ning small deficits. The result is a –6.7% deficit
for 2020; that’s pretty representative of global
fiscal deficits. To summarize, at left we show
the contribution to the total fiscal deficit by
country; the US, China, and Eurozone are all
raising global deficits by 1% or more, with the
US close to 3%.
The question is: how much is all that deficit
spending crowding out fixed income markets?
We use the policy rate—ten year term struc-
ture as a proxy, under the theory that steeper
curves indicate higher risk premiums related to
inflation (generated by excessive stimulus and/
or malinvestment) and/or expectations of high-
er policy rates to tamp down said inflation. The
results are fascinating. In developed markets,
there’s very little relationship (r-squared =
0.100) between the term structure and the size
of 2020’s fiscal deficit relative to GDP. In other
words, little evidence that markets are worried
deficits are going to fuel bad outcomes. For
emerging markets, it’s the complete opposite:
higher deficits mean steeper curves.
This dichotomy perfectly summarizes the differ-
ence between developed and emerging mar-
kets rates; only the former sees modest costs
to expanded deficits.
Developed Markets Show Little Crowding Out
Emerging Markets Are The Opposite
Projected 2020 Fiscal Deficit % of Global GDP
Note: accounts for 85% of
2020 GDP. All GDP
numbers are OECD 2020
estimates. Total = 6.7% of
World GDP
y = -0.0262x + 0.0764R² = 0.0995
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
-15 -10 -5 0 5
10y
-P
oli
cy R
ate
Cu
rve
(%)
Projected 2020 Fiscal Deficit
y = -0.466x - 0.7721R² = 0.7258
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
-12 -10 -8 -6 -4 -2 0
10y
-P
oli
cy R
ate
Cu
rve
(%)
Projected 2020 Fiscal Deficit
-2.91-1.06
-0.96-0.38-0.33-0.26
-0.14-0.12-0.11-0.09-0.07-0.07-0.05-0.05-0.04-0.03-0.03-0.02-0.02-0.01-0.010.00
0.01
-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5
USChina
EZJapan
UKBrazilIndia
TurkeyCanada
AustraliaMexicoRussia
South AfricaKorea
PolandIndonesia
SwedenChile
SwitzerlandNew Zealand
DenmarkCzech Rep.
Norway
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Treasury Yields, Prices, and 30 Year Fixed Mortgage Rate
National Average 30 Year Mortgage Rate (%)
30 Year Treasury Future (Price, Roll Adjusted) 30 Year Treasury Bond (Yield, %)
2 Year Treasury Future (Price, Roll Adjusted) 2 Year Treasury Note (Yield, %)
10 Year Treasury Future (Price, Roll Adjusted) 10 Year Treasury Note (Yield, %)
5 Year Treasury Future (Price, Roll Adjusted) 5 Year Treasury Note (Yield, %)
107.0
107.5
108.0
108.5
109.0
109.5
110.0
110.5
111.0
3.5
3.7
3.9
4.1
4.3
4.5
200 DMA
0.00
0.40
0.80
1.20
1.60
2.00
2.40 200 DMA50 DMA
116
118
120
122
124
126
200 DMA
50 DMA
0.20
0.60
1.00
1.40
1.80
2.20
2.60
200 DMA
50 DMA
123
125
127
129
131
133
135
137
139
141
200 DMA
50 DMA
0.20
0.70
1.20
1.70
2.20
2.70
200 DMA
50 DMA
160
170
180
190
200
210
220
230
240
250
200 DMA50 DMA
0.50
1.00
1.50
2.00
2.50
3.00 200 DMA
50 DMA
50 DMA
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Money Markets, ETFs and Trade of the Week
Today TLT is set to open below its 50-DMA
thanks to yield curve steepening in the wake of
the Treasury’s quarterly refunding announce-
ment. Only one other close below the 50-DMA
has come in the past four months. Conspicuous-
ly, that close was the low for equity markets,
which bounced thanks to widespread policy sup-
port across fiscal and monetary action. The de-
cline today back below trend is therefore nota-
ble to us as a key shift in sentiment and change
in the qualitative backdrop of markets.
Compression in “risk free” rates premium over
the last few months has been one among a
range of tailwinds for high-duration assets like
corporate bonds and equities. If that tailwind
can change to a headwind without an improve-
ment in economic activity that also provides sub-
stantial support for the equity market outlook,
it’ll be the first time since 2018 that rates will be
rising into the teeth of a deteriorating economy.
Even with losses today, duration has still ruled
the roost for YTD returns.
Yield 5 Day YTD
Ticker Name Price (%) TR (%) TR (%)
AGG Core US Bond Mkt 116.88 2.43 -0.21 4.89
BIL 1-3 MoT Bill 91.53 0.19 0.00 0.41
BIV Vang. Intrmed. 91.11 2.34 -0.11 5.36
BKLN Senior Loans 20.76 4.52 -1.05 -7.60
BLV Vang. Long Term 108.84 2.87 -1.61 9.91
BND Tot Bond Mkt 87.31 2.39 -0.11 4.99
BOND PIMCO Tot Ret 109.43 2.85 0.08 2.55
BSV Barc. Short Term 82.55 1.98 -0.02 3.12
IGSB 1-3 Yr Corp. 53.54 2.69 0.06 0.79
EDV Long Dur. Trsy 169.32 1.98 -2.00 30.91
EMB JPM EM Bonds 100.78 4.51 0.84 -10.67
FLOT Floating Rate 49.93 2.24 0.17 -1.24
HYG iBoxx HY 79.25 5.59 -0.81 -8.21
IEF 7-10 Yr Bonds 121.64 1.26 -0.16 10.89
IEI 3-7 Yr Trsy 133.22 1.13 -0.03 6.48
JNK Barc. High Yield 97.57 6.36 -0.72 -9.20
LQD iBoxx Invest. Grade 128.37 2.99 -1.05 1.36
MBB MBS 110.89 2.36 0.19 3.50
PFF Preferreds 33.99 5.99 -1.41 -7.81
PGF Financial Preferreds 17.92 5.44 -0.55 -3.20
PGX Preferred Port. 14.02 5.30 -0.99 -4.87
SPSB Barc. Short Term 30.92 2.26 0.25 1.07
SHM Short Term Munis 48.99 1.34 0.38 0.19
SHV Short Term Trsy 110.82 0.99 0.02 0.81
SHY 1-3 Yr Trsy 86.59 1.00 0.01 2.84
SNLN iBoxx Sen Loan 15.57 3.08 -0.50 -9.95
STPZ PIMCO 1-5 Yr TIPS 52.31 3.21 -0.11 0.48
TIP TIPS 121.27 2.95 -0.53 4.55
TLH 10-20 Yr Trsy 168.20 1.39 -0.59 17.77
TLT 20+ Yr Trsy 166.09 1.56 -1.43 23.31
VCLT Long Term Corp 101.26 3.58 -1.59 1.15
VCSH Vang. Short Term 80.93 2.51 0.17 0.77
TBF Short 20+ Yr Trsy 15.38 0.91 1.32 -21.40
TBX Short 7-10 Yr Trsy 23.96 0.38 0.20 -9.79
Key Fixed Income ETFs
Fid. Cash 0.01 0.000 Fed Funds 0.050 0.010
Van. Prime 0.57 -0.080 O/N Libor 0.057 0.001
Blackrock Cash 1.52 1.519 1M Libor 0.263 -0.175
Fid. Munis 0.15 0.020 3M Libor 0.501 -0.340
Schwab Govt 0.03 -0.071 4 Wk T Bill 0.081 0.023
Fidelity Prime 0.46 -0.030 3M T Bill 0.114 0.036
JPM Prime 0.32 -0.045 6M T Bill 0.140 0.044
State St Gov't 0.20 -0.020 1Y T Bill 0.157 0.018
GS MMkt 0.52 -0.104 Repo 0.090 0.105
Money Market Rates
Money Market Funds Key Short Term Rates
Projected 2020 Fiscal Deficit % of Global GDP
130
135
140
145
150
155
160
165
170
175
180
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Treasury Yield Curve: Current vs 3 Months Prior, w/ BPs Change
Bunds Yield Curve: Current vs 3 Months Prior, w/ BPs Change
Eurodollar Yield Curve: Current vs 3 Months Prior, w/ BPs Change
Inflation Curve: Current vs 3 Months Prior, w/ BPs Change
Bespoke Global Yield Curve: Current vs 3 Months Prior, w/ BPs Change
-132.49
-125.55-116.52
-106.42-99.05
-95.1
-73.89
0
50
100
150
200
250
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
5/6/2020
2/12/2020
+2.8
-15.6 -16.7-17.8
-18.4
-28.3
-20
-100
-80
-60
-40
-20
0
20
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
5/5/2020
2/12/2020
-131.5 -127.5 -117-110.5 -107.5 -103.5 -105 -101.5
-100.5 -97.5
-98
0
20
40
60
80
100
120
140
160
180
3 Mo 6 Mo 9 Mo 12 Mo 15 Mo 18 Mo 21 Mo 24 Mo 27 Mo 30 Mo 33 Mo
5/6/2020
2/12/2020
-217.4
-144.65
-120.81
-92.36-75.2 -56.55
-27
-120
-70
-20
30
80
130
180
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
5/6/2020
2/12/2020
-78.46-70.17
-61.16
-47.33
-37.04
-25.54
-8.48
110
130
150
170
190
210
230
250
270
290
310
1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year
5/6/2020
2/12/2020
Benchmark Yield Curves Treasury refunding today is concentrated out the
curve as issuance begins on 20 year notes and
issuance is rolled further out. Treasury has an
enormous amount of cash on hand in the Treas-
ury General Account (just shy of $1trn in the most
recent data, a record) obviating the need for more
bills as CARES Act funds get doled out.
Two year yields have technically made marginal
new lows over the last couple of days, and out-
year Eurodollars have been making new highs in
price (lows in yield), but the move has been very
small overall. In short, rates volatility has col-
lapsed thanks to the return to the effective lower
bound.
The combination of a failed mutual Eurozone debt
instrument to meet COVID challenges and the rul-
ing by Germany’s highest court this week that the
ECB’s government bond QE may violate German
law haven’t dealt a death blow to spreads. Italy’s
250 bps spread is well below the peaks from when
Lega controlled the government in 2018.
When compared to their relationship over the
past year, oil prices and 10-year breakevens are
trading right in-line with where they ought to be.
The collapse in TIPS prices that drove plunging
breakevens in March thanks to weak liquidity dur-
ing that period and negative oil prices at the front
of the curve are in the rearview mirror.
Interest rates tracked by our Bespoke Global Yield
Curve continue to make new lows across the
front term structure. Longer-term yields are
much more stable, leading to the steepest read-
ings for the 2s10s and 5s30s term structure in 5
years. In the case of 5s30s, that steepening has
taken the slope of the curve to near its highest
levels in the history of our data.
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Bespoke Global Yield Curve: 2 Year Bespoke Global Yield Curve: 5 Year
Bespoke Global Yield Curve: 10 Year Bespoke Global Yield Curve: 30 Year
Bespoke Global Yield Curve: 2s10s Bespoke Global Yield Curve: 5s30s
130
150
170
190
210
230
250
270
290
310
330
170
190
210
230
250
270
290
310
330
350
370
210
235
260
285
310
335
360
385
410
270
310
350
390
430
470
30
40
50
60
70
80
90
100
110
120
130
55
65
75
85
95
105
115
125
135
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Curves, Spreads and Total Returns
2 Year vs 5 Year 10 Year German Bund Long Dated Treasuries
Treasury Curves (BPs) Spreads vs Treasury (BPs) Total Return Over Past Year (BPs)
High Yield Corporates
Municipal Bonds
Mortgage Backed Securities
Emerging Markets2 Year vs 10 Year
5 Year vs 10 Year
5 Year vs 30 Year
10 Year vs 30 Year
10 Year Italian BTP (vs German Bund, not Treasury)
Municipal Bonds
10 Year Swap
High Yield Corporates
-15
-10
-5
0
5
10
15
20
25
30
-10
0
10
20
30
40
50
60
70
80
4
8
12
16
20
24
28
32
36
40
44
48
45
55
65
75
85
95
105
115
35
40
45
50
55
60
65
70
-270
-250
-230
-210
-190
-170
-150
-130
-110
-90
120
160
200
240
280
320
-16
-8
0
8
16
24
32
40
48
56
64
-14
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
330
430
530
630
730
830
930
1030
1130
-1800
-1500
-1200
-900
-600
-300
0
300
600
900
-600
-400
-200
0
200
400
600
800
1000
-500
0
500
1000
1500
2000
2500
3000
3500
4000
4500
0
100
200
300
400
500
600
700
800
-800
-600
-400
-200
0
200
400
600
800
1000
1200
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Page 2: These charts track the performance of the yield of Treasury bonds and their price in the futures
market over the past year. Also presented is the National Average 30 Year Fixed Rate Mortgage ac-
cording to bankrate.com’s index of mortgage lending.
Page 3: At upper left is a table summarizing the level and change of short term interest rates. Money
market fund rates represent the highest yields available to large money market fund investors for a
spectrum of funds. Next to the money market fund rates are benchmark short-term interest rates.
Each change represents the change in yield over the last five days. At lower left we show a grid of ma-
jor fixed income ETFs and include yield, five day change, and year to date total return for each ETF.
Our Trade of the Week is intended as a starting point for further research.
Page 5: Benchmark yield curves are “risk free” interest rates that other fixed income securities trade
relative to. All yield curves are expressed in basis points. Three month changes in the curves are
shown in basis points at each point on the curve. The Bespoke Global Yield Curve is a Purchasing Pow-
er Parity Gross Domestic Product-weighted average of nominal yields for the world’s fifteen largest
economies. It is graphed versus the yield curves for the United States and Germany, the two most-
followed global benchmarks.
Page 5: Time series charts for the yields of the Bespoke Global Yield curve, presented in basis points.
Page 6: The Treasury curve charts in column one show the difference in yield between the second se-
curity listed and the first. For instance, if 2 Year Treasuries currently yield 0.45% and 5 Year Treasuries
yield 1.45%, the “curve” between 2 Years and 5 Years is 1.00%. Typically, a flattening yield curve (a
chart of the curve moving downwards, or the difference between the two yields narrowing) is an indi-
cation of economic headwinds, but the absolute level of the curve between Treasuries can be as im-
portant as the change in that curve.
The spreads column shows yield differences between Treasuries and other important sectors of the
fixed income market. Each spread is expressed as the yield on the bond in question. For instance, if
Italian 10 Year government bonds or “BTPs” yield 3.50% and 10 Year Treasuries yield 3.00%, the spread
between them is 0.50%. This spread can be negative. All else being equal, a positive spread to Treas-
uries indicates increased credit risk. But when spreads are measured between two different currencies
(for instance, between German Bunds and Treasuries), a negative spread to Treasuries can be caused
by different inflation expectations, real growth rates or other differences between the currencies in
question.
Finally, the total return indices in the right hand column show the total return for Bank of America
Merrill Lynch bond market indices in each sector listed. Total return shows both coupon income and
price appreciation for each basket of bonds. These total returns are graphed as total return over the
prior year, starting from zero as of one year ago today.
The Fixed Income Report Explained