Bond Bear Eyes Tactical Long In Treasury Notes | David Cervantes
Oct 9, 2023
01:05:23
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The podcast discusses David Cervantes' macroeconomic views, trading preferences, and the recent sell-off in the bond market. They explore the impact of Federal Reserve bond purchases on interest rates and the relationship between public sector deficits, private sector surpluses, and the possibility of a recession.
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Quick takeaways
Housing sales have less economic impact compared to construction spending and employment, indicating a housing shortage as a contributing factor to the strength of the construction sector.
The interplay between declining mortgage rates and economic activity picking up suggests a correlation between the two.
When tracking economic data, it is crucial to consider the nuance and context of each indicator to avoid false signals and distorted data.
Deep dives
David Cervantes' Background and Trading Approach
David Cervantes, founder of Pine Brook Capital Management, shares his background and trading approach. He primarily focuses on macroeconomic analysis and expresses his views through the rates complex. He trades futures, options, and ETFs, primarily in the rates market.
Understanding the Housing Market and Economic Cycle
David Cervantes discusses the interplay between the housing market and the general economy. While there were concerns about a recession fueled by the housing market, Cervantes found that housing sales and transactions had less of an economic impact compared to construction spending and employment. He identified a housing shortage as a contributing factor to the strength of the construction sector. Cervantes became bullish on housing stocks and observed a correlation between declining mortgage rates and economic activity picking up.
Cervantes' Views on Rates and Economic Outlook
Cervantes discusses his tactical positions in the rates market. He initially shorted twos but stayed away from the rates market until mid-summer. He took a big short in the 10-year when yields were at 3.78% and covered it in early August. Cervantes notes the impact of real yields in driving his decisions and looks for a pullback in the growth speed of the economy. He reveals a recent long position in the 10-year at 4.75%. While not particularly bullish on equities, he considers a tactical long position if they reach mid-3900s. Cervantes also offers insights on asset allocation and the importance of targeting nominal GDP instead of focusing on inflation.
Evaluating Economic Indicators
When tracking economic data, it is important to distinguish between reliable and misleading indicators. The podcast discusses the significance of understanding which economic readings are worth paying attention to and which ones may provide false signals. Factors such as supply chain disruptions can impact survey-based indicators like Purchasing Managers' Index (PMI), leading to distorted data. It is crucial to consider the nuance and context of each indicator when analyzing the real economy.
The Effect of Fiscal Policies and Money Supply
The podcast highlights the impact of fiscal policies and money supply on the economy. The considerable amount of stimulus money injected into the economy, resulting in high GDP deficits and increased accessibility to liquidity, has created a scenario where the chances of a recession are low. The substantial influx of money circulating in the economy, along with the Federal Reserve's purchase of government bonds, contributes to a favorable economic outlook. While factors like issuance and supply issues may influence the market, the overall sentiment leans towards ongoing economic growth.
David Cervantes of Pine Brook Capital Management LLC joins Forward Guidance to share why he faded the recession consensus of 2022, why he decided to short bonds this year, and why as of early October he sees an opportunity to be long the U.S. 10-year Treasury as a tactical long. Filmed on October 5, 2023.
Follow David Cervantes on Twitter https://twitter.com/pinebrookcap
Follow Jack Farley on Twitter https://twitter.com/JackFarley96
Follow Forward Guidance on Twitter https://twitter.com/ForwardGuidance
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Timecodes:
(00:00) Introduction
(02:58) Why 1 Year Ago Cervantes Thought Recession Was Unlikely
(07:05) Cervantes' Short Bond Trade
(14:45) Fed Policy
(26:16) Tracking The Economy
(32:35) There May Be A Slowdown, But A Recession Is Unlikely In Near-Term
(45:41) The Maturity Wall
Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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