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Credit downgrades, bond volatility, and your summer reading list
The Hard Road Newsletter
Jacob Traut
August 7th, 2023
So, the US credit rating was downgraded from AAA to AA+ by Fitch.
“Steady deterioration in the standards of Governance” sounds an awful lot like they have a problem with the money printer, and Debt Ceiling shenanigans.
Its a pretty groundbreaking development, considering this is the second time in history the United States credit rating was downgraded. There was spirited discussion in the community as to whether this was relevant or not, many agreed with Janet Yellen’s position that it was an “arbitrary” decision.
The bond market disagreed, however. Bond Yields on the 10 Year Note spiked above 4% for the first time in a couple months. Strange how notable things have happened the last few times we were over 4%…
You’ve start the trip back in memory lane with a random spike and rejection back in July.
Then you’ve got the meltdown and collapse of multiple banks back in March.
Then you’ve got the start of the mostly unexplained market bottom back in October of 2022.
I dunno. That’s all just weird to me. Anyway,
Moritz Kraemer, former credit rating analyst who downgraded the U.S. in 2011.
He believes governments are in much worse shape than they're telling us & ratings agencies are unwilling to downgrade western nations over fear of retaliation. http
— Financelot (@FinanceLancelot)
2:30 AM • Aug 4, 2023
The dude who downgraded the Feds back in 2011 and caused a 5% down day on the SPY says people are afraid to do it. No surprise there. I would be too.
Meanwhile, in Japan,
Yield Curve Control is dead, long live yield curve control!
But Jake, I’m an American trading American bonds, why do I care what the Bank of Japan does?
Fair question my friend.
There is an interesting correlation to be found between the 10Y and the Japanese Yen. Check out this article for a quick primer.
The TLDR is that US Bond yields up = Yen value vs the Dollar down.
And mathematically speaking, the inverse is also true.
And as the BOJ is lifting Yield Curve Control.
No more artifically low interest rates in Japan means that as interest rates rise, the value of the US10Y will go down. Driving US10Y rates higher.
All I know is that watching Japan and their Inflation Numbers very carefully. We may get signals of how to play Bonds/Currencies in the coming weeks.
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