There’s no working from home in baseball!  From Bloomberg:

Major League Baseball has ordered its employees to return to the office five days a week, according to people familiar with the matter.

The league had been on a hybrid policy since the pandemic. The change will go into effect in February, said the people, who asked not to be identified discussing private information. The league believes it operates best with staffers in the office working face-to-face, according to one of the people. 

Tinker to Evers to Chance.

Everybody has a bad decade now and then: the zero-interest rate era’s emphatic end has dealt lasting pain to long-dated government bonds, as Bank of America strategist Michael Hartnett finds that rolling 10-year returns for Treasurys of at least 15 years in duration stand at minus 0.5%, the worst such showing according to data dating to the mid-1930s.

On a similar vein, the long bond has generated a minus 2.24% annualized total return over the past 10 years, Bianco Research relays, compared to a 13.62% annual gain for the S&P 500. That’s the largest such performance gap since at least 1992 (see the Dec. 20 issue of Grant’s Interest Rate Observer for a look at one capital-efficient way to play for a rebound in the beleaguered long-duration bond complex).

As the blue-chip stock market flirts with fresh highs following a 50%,15-month upside stampede, investors increasingly position for more of where that came from. Thus, a net 41% of respondents to Bank of America’s latest Global Fund Manager Survey report an overweight allocation to equities, compared to a net 20% assuming an underweight position in fixed income.  Similarly, 68% of attendees at last week’s Goldman Sachs Global Strategy conference in London forecasted that stocks would outperform all other asset classes this year, with 10% venturing to predict that bonds will fare best. One year ago, those figures were 42% and 20%, respectively.

Individual investors are likewise loaded for bull. Bloomberg’s Eric Balchunas points out today that the Vanguard S&P 500 ETF (ticker: VOO) has hoovered up $16.1 billion of inflows in this young 2025. For context, the trio of runners up – Vanguard’s Total Stock Market Index Fund ETF, the iShares 0-3 Month Treasury Bond ETF and iShares 20+ Year Treasury Bond ETF – have collectively gathered just over $7 billion over that stretch.  VOO has seen net assets swell by 97% since October 2023, roughly double the index’s total return over that period.

Then, too, some punters turn to the elixir of leverage to ramp up their exposure: trading venue Interactive Brokers relayed Tuesday that outstanding margin loans rose 45% year-over-year to $64.2 billion as of Dec. 31.  For context, that metric peaked at just below $55 billion during the frenzied bull market of 2021.

“Asset prices are kind of inflated,” JPMorgan boss Jamie Dimon told CNBC from Davos, Switzerland this morning. “You need fairly good outcomes to justify those prices, and we’re all hoping for that.”

Maybe not the bears. Whatever happened to the bears?

Another round of tech-led euphoria led the S&P 500 to the cusp of a new high, though the averages did lose some steam in the final moments of the cash session, while 10- and 30-year Treasurys ticked to 4.6% and 4.82%, up three and two basis points, respectively. WTI crude finished slightly lower at $75 and change per barrel, gold remained on the front foot at $2,756 an ounce, bitcoin slipped to $104,000 and the VIX remained at 15.

- Philip Grant

From Reuters:

Global luxury goods companies are expected to pull out all the stops this year to persuade U.S. shoppers to splash out on diamond bracelets, quilted leather handbags and other designer fashions, given forecasts for more market weakness in China.

Retail executives are looking to tap into wealth in the United States linked to the strong stock market and rise in cryptocurrencies, while potential tariffs from U.S. President-elect Donald Trump could support the dollar, raising Americans' purchasing power for European luxury goods.

U.S. credit card spending on luxury brands in December improved, turning positive for the first time in more than two years, rising 1% year-on-year, based on data from Citi, thanks to better sales of leather goods and clothing. . . Last year was likely to have been one of the sector's weakest on record, with sales down 2% [worldwide], based on previous estimates from consultancy Bain & Company.

The recent stock-market stutter step has done little to curtail pervasive risk appetite according to a pair of Wall Street mainstays: institutional investors have increased their allocations to the mega-cap technology complex to their highest levels in six months, Deutsche Bank-collected data show. Similarly, Goldman Sachs’ prime brokerage customers have acted as net tech buyers for four consecutive weeks, with the desk reporting its most pronounced shopping spree since October.

“Managers have started buying technology, media and telecom again after a period of selling and rebalancing,” Jonathan Caplis, CEO of hedge fund research firm PivotalPath, told Bloomberg Thursday. The Magnificent Seven logged a 3.2% pullback from the Dec. 18 Fed meeting through Tuesday compared to a 0.5% downtick for the S&P 500, but as Bloomberg notes, “the latest turbulence did little to increase hedging appetite,” with demand for put options shrinking relative to calls in recent weeks following a brief spike last month. That charmed cohort has returned 265% since the start of 2023, dusting the broad index’s 60% showing.

Investors likewise remain ravenous for speculative-grade corporate paper despite the recent updraft in borrowing costs, as one eye-catching deal illustrates. On Tuesday, double-B-minus/single-B-plus-rated Clarios Global priced $700 million in senior secured five-year notes at a 6.75% coupon – down from initial price talk of 7% to 7.25% on the strength of an order book topping $5.5 billion – along with a $3.5 billion, seven-year term loan at 275 basis points over the Secured Overnight Financing Rate, instead of the 300 to 325 basis point premium initially bandied about. 

Those securities, which have each subsequently rallied above par according to CreditSights, will help finance a hefty $4.5 billion payout to the electric vehicle battery manufacturer’s shareholders, including Brookfield Asset Management.  That deal marks one of the largest so-called dividend recaps on record by PitchBook LCD’s lights. For context, buyout firms issued $68.3 billion in loans to pay themselves dividends last year, the second-highest total on record behind 2021’s $73.2 billion haul.

Bulled-up fiduciaries are even venturing far afield in search of fat returns. As the Financial Times documents today, “pension funds are dipping their toes into buying bitcoin,” with state-run retirement schemes in Wisconsin and Michigan registering among the top hodlers of various crypto-focused ETFs and pension managers in the U.K. and Australia allocating to the digital ducats via funds and derivatives in recent months.

“Since election day, we have been getting a flood of [inbound] queries,” Matt Scott, a consultant at pension advisory firm Mercer, advised the pink paper. “Trustees don’t like to think that there’s a hot asset class out there that they don’t know anything about.”

Almost Daily Grant's will resume on Tuesday, Jan. 21

From Bloomberg:

Canadians should be prepared to face U.S. tariffs once Donald Trump assumes the presidency next week, with no exemptions for oil, Alberta Premier Danielle Smith warned after meeting the president-elect in Florida.

The conservative leader of Canada’s main oil-producing province met with Trump at his Mar-a-Lago resort over the weekend. Canadian Prime Minister Justin Trudeau said in an interview with MSNBC that Canada will respond with counter-tariffs against the U.S. if Trump follows through with his threat to impose a 25% levy on Canadian goods.

“We do need to be prepared that they are likely to come in on Jan. 20,” Smith said at a news conference on Monday. “I haven’t seen anything that suggests that he’s changing course.”

It’s a banking bumper-crop: A quintet of mega-lenders is set to begin fourth quarter earnings season in style later this week, with JPMorganChase, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America poised to report a combined $24.5 billion in trading revenues if Bloomberg-compiled sell side forecasts are on point, up 15% from the final three months of 2023 and the best showing for the period in at least five years.

Rampaging animal spirits in the stock market alongside a flurry of election-related activity likely proved a lucrative combination for that cohort. “It was a very strong end of the year for capital markets,” observes Scott Siefers, banking analyst at Piper Sandler.  Then again, “the banks have a lot to deliver relative to expectations,” Charles Peabody, head of independent research firm Portales Partners, tells the Financial Times. “I am not worried about this quarter, but I do worry about 2025 because, relative to the risks that are developing, the optimism is too strong.”

Meanwhile, the recent jump in interest rates could bring an industry boogeyman back to the fore. Barron’s associate editor Andrew Bary estimated last week that domestic banks are collectively nursing $500 billion in unrealized losses on their holdings of lower-yielding Treasurys and agency mortgage-backed securities, compared to $346 billion in red ink one quarter ago per data from the Federal Deposit Insurance Corp. (for more, see the Jan. 27, 2023 edition of Grant’s Interest Rate Observer).

Bank of America, which is scheduled to release fourth quarter figures on Thursday morning, could see unrealized losses on its $568 billion held to maturity portfolio (as distinct from held for sale securities which are marked to market, with unrealized losses deducted from reported capital) top $111 billion. That compares to $86 billion three months earlier and compares to the bank’s $200 billion in tangible equity as of Sept. 30. 

The Charlotte-based behemoth undertook an ill-timed shopping spree during the zenith of the bygone bull market, building its HTM holdings to $675 billion from $216 billion over the two years through 2021. With those assets yielding a paltry 2% on average and the roll-off from maturing securities registering at a 6% to 7% annual pace in recent quarters, “the low yield on its portfolio could be a drag on its profits for some time,” Bary notes.   

Stocks staged a solid rebound from an early downdraft to leave the S&P 500 and Nasdaq 100 within about a quarter percentage point of unchanged, while Treasurys likewise managed a mostly flat finish with 2- and 30-year yields at 4.4% and 4.97%, respectively. WTI crude remained red hot at nearly $79 a barrel to leave the commodity higher by nearly 10% in this young 2025, while gold pulled back to $2,662 per ounce. Bitcoin bounced towards $94,000 after testing $90,000 this morning, and the VIX settled just north of 19.  

- Philip Grant

Talk about a close shave. From Reuters:

Country Garden has proposed a deal to its offshore creditors that will cut its debt by $11.6 billion, paving the way for the property developer to seek more time from the high court in Hong Kong to implement a restructuring plan. . .

Once China's biggest property developer, Country Garden defaulted on $11 billion in offshore bonds in late 2023, deepening a debt crisis in the sector that had already experienced defaults by many developers, including China Evergrande Group.

Country Garden had $16.4 billion of offshore debt at the end of 2023, including $10.3 billion in bonds and three syndicated loans with an outstanding principal amount of $3.6 billion. Both are covered by the restructuring.

The proposal, announced on Thursday, outlines options for creditors, including a conversion of debt into cash with a 90% haircut or receiving new debt instruments with delayed maturity.

No 2%, no problem. Federal Reserve Governor Christopher Waller delivered an unmistakably dovish message yesterday despite a U.S. Core PCE Price Index which has shown no less than 2.6% annual growth during the 44 months through November: “this minimal further progress [towards the Fed’s self-assigned annual target] has led to calls to slow or stop reducing the policy rate. However, I believe that inflation will continue to make progress. . . and that further reductions will be appropriate.”

Waller – appointed to his post by Donald Trump in 2020 and rumored by Bloomberg last fall as the President-elect’s choice to succeed chair Jerome Powell – echoed the sentiments of his once-and-potential-future benefactor, who opined Tuesday that “interest rates are far too high.”

Meanwhile, one pillar of the outgoing Biden administration sounded the alarm over the shoddy state of Uncle Sam’s finances. Treasury Secretary Janet Yellen told CNBC yesterday that “fiscal policy needs to be put on a sustainable course,” adding that “investors around the globe count on the United States to be responsible in managing its fiscal policy. . . and I certainly hope that the new administration will take this seriously.”

The federal shortfall rose to $1.83 trillion over the 12 months through September from $1.7 trillion in the prior fiscal year as outlays reached $6.7 trillion, up 10% year-on-year. Yellen, who has overseen a $7 trillion uptick in debt held by the public over the past four years to $28.8 trillion, struck a skeptical tone with respect to Elon Musk’s and Vivek Ramaswamy’s much-ballyhooed goal to trim upwards of $2 trillion in federal fat via the newfangled Department of Government Efficiency: “it’s hard to see how the math on that works.”

For his part, the Tesla boss himself backtracked on those ambitions in a Thursday interview on X, deeming the $2 trillion bogey “the best-case outcome” and commenting that “we’ve got a good shot” at $1 trillion in spending cuts. Nondiscretionary line items such as social security, health care, defense and interest expense gobbled up nearly 80% of the fiscal 2024 budget.

Indeed, the citizenry’s appetite for personal sacrifice in service of government “right-sizing” appears to be in short supply, if sentiment within one jurisdiction adjacent to the nation’s capital is any indication.

Thus, a Gonzales Research and Media poll of 811 Maryland-based registered voters conducted over the week through Jan. 4 found that 73% of respondents opposed an increase in the sales tax to help close the state’s $3 billion budget deficit, with 77% balking at an upsized levy on properties. As local news source Mayland Matters also notes, “that majority opposition cuts across political affiliations, racial and age demographics.”

See the analysis “Race against compound interest” in the current issue of Grant’s Interest Rate Observer dated Dec. 20, 2024, for a closer look at the daunting arithmetic facing Trump, Musk, Ramaswamy and other stewards of the public credit, along with “The inflation we choose” in the Feb. 2, 2024 edition for more on the inherent predilection across Washington, Wall Street and Main Street alike for policies that serve to keep the price level humming.

Treasurys wiggled in indecisive fashion during today’s abbreviated session, with the long bond ticking to 4.92% from 4.91% Wednesday and two-year yields edging lower by a basis point to 4.27%, while the stock market was closed in honor of former President Jimmy Carter. WTI crude flipped back above $74 a barrel, gold ground higher again to $2,670 per ounce and bitcoin slumped towards $92,000.

Owing to the delayed release of the Fed’s weekly balance sheet data, the QT progress report will appear tomorrow.

- Philip Grant

Enter the leveraged real estate speculator.  Here’s President-elect Donald Trump, who will assume the reins of power in 13 days, channeling the duality of man at a Tuesday press conference in Palm Beach:

Inflation is continuing to rage, and interest rates are far too high.

Investors seem to quibble with that second contention. Tuesday afternoon’s auction of benchmark 10-year Treasurys priced at 4.68%, marking the highest yield for a new sale since 2007 and contrasting with the sub-1% figures seen during 2020.  

That result followed a hotter-than-expected data set including 8.1 million job openings in December as measured by the Bureau of Labor Statistics, topping all 29 economist guesstimates, as well as a near two-year high for the inflation-measuring prices-paid component of the Institute for Supply Management’s December Services PMI, “reinforc[ing] the market’s view of a strong U.S. economy and rates [that] are not restrictive,” Brandywine Global Investment Management portfolio manager Tracy Chan told Bloomberg.

Let’s make a deal:  McDonald’s doubled down on its embrace of budget conscious consumers Tuesday, rolling out an expanded value offering including a “Buy One, Add One for $1” breakfast, lunch and dinner offer, along with other discounts for those who download its in-house app.  

Mickey D’s will likewise run its $5 Meal Deal (which includes a McDouble or McChicken sandwich, small order of fries, small soft drink and four-piece order of chicken nuggets) through the summer, marking the promotion’s second extension following its July 2024 debut.  

Those efforts are a long time coming to some observers. Menu prices at the Golden Arches rose by 40% on average over the five years through last fall, helping spur back-to-back annual same store sales declines in the second and third quarters after an uninterrupted run of growth from the virus-wrecked spring of 2020. “The industry environment remains challenging, there’s no doubt about that,” CFO Ian Borden lamented on the October earnings call. “Consumers are under pressure.”  

The fast-food giant has company in its latest overture towards cash-strapped diners. As Jonathan Maze of Restaurant Business Online documents today, sandwich outfit Subway recently debuted its own “Meal of the Day” discounted offerings, including $9.99 for a footlong sub and drink along with either two cookies or chips, while poultry behemoth KFC revived its $5 bowls replete with various chicken, starch and vegetable combinations.  

Restaurant-wide same store sales showed a 2.8% year-over-year increase in November according to data compiled by Black Box Intelligence, with foot traffic ticking higher at a 0.9% clip, leaving each of those metrics at their strongest in over a year. Yet the firm points out that calendar-based tailwinds helped drive that improvement as the Thanksgiving weekend spilled into December, making for easier comparisons and nudging slower business days into the following period. Indeed, sales and traffic trends weakened once more relative to 2023 during the early stages of last month.

See the analysis “With a side of debt” in the July 5 edition of Grant’s Interest Rate Observer for more on the fast-food industry’s aggressive balance sheet machinations during the bygone zero-interest rate era which now complicate efforts to contend with post-Covid inflationary pressures, along with “Here’s the beef” in the Nov. 8 issue for a bearish look at one richly valued operator crowned America’s most-overpriced chain restaurant via a Preply-conducted analysis of Google keywords.

A sell-the-news reaction to Nvidia’s CES presentation Monday evening (shares dropped 6% after an 11% rally over the first three days of the year) helped spur a 1.1% downdraft on the S&P 500, with the broad averages finishing just off their worst levels of the day. Treasurys also remained under pressure with the long bond rising six basis points to 4.91% and the two-year note edging to 4.3% from 4.28% Monday, while WTI crude flipped back above $74 a barrel and gold advanced to $2,650 per ounce. Bitcoin sank below $97,000 and the VIX ripped nearly two points to finish just below 18.

- Philip Grant

Back to the old salt mine: The first full week of 2025 brings no shortage of potential market-moving events, headlined by Jensen Huang’s Monday evening keynote speech at the annual CES technology conference. The Nvidia CEO will bring “his trademark leather jacket and an unwavering vision” (as the corporate press release puts it) to the Las Vegas Convention Center Stage, with Wall Street expecting big things following a 900%, two-year share price rampage.

The bond market will likewise present its share of potential catalysts, with the Treasury set to auction $58 billion in three-year notes Monday, followed by a $39 billion 10-year note reopening Tuesday and a $22 billion long bond sale Wednesday (that compares to $52 billion, $37 billion and $21 billion respective auctions for those three tenors in early 2024).  “Forward guidance” aficionados are likewise in luck following the holiday lull; seven separate Federal Reserve members are scheduled to hold forth.

Tesla bulls received an unwelcome surprise Thursday, as the electric vehicle mainstay announced that fourth quarter vehicle deliveries totaled just under 496,000, trailing the consensus estimate of about 505,000. The full year tally registered at 1.77 million, down from 1.81 million in 2023 to mark its first annual decline by CNBC’s lights.

To be sure, the world’s most richly valued automaker (market cap: $1.24 trillion) continues to dazzle its devoted shareholder base with unique assets such as an extensive charging network, to say nothing of Elon Musk’s now-prominent influence within the incoming Trump 2.0 administration. Even so, Thursday’s figures reflect Tesla’s continued struggles with “the nuts-and-bolts job of being a car company,” Patrick George, editor in chief of industry publication InsideEVs, told the financial news network.

In fairness to Musk’s corporate pride and joy, the automotive industry at large is making heavier weather of it these days as persistent inflationary pressures and the post-Covid updraft in borrowing costs turn the screws. Citing data from the U.S. Bureau of Economic Analysis, The Wall Street Journal’s Spencer Jakab pointed out last month that average annual vehicle sales registered at roughly 15.5 million over the past four years, down from 17.7 million just before the bug barged in. The average passenger car is now 13.6 years old, compared to 8.4 years in the mid-1990s.

Consumers’ growing reluctance to spring for new wheels is no surprise, as freshly released data from Edmunds illustrate. Thus, the automotive research firm relayed Friday that new car shoppers financed a record $42,113 for their vehicles on average in the fourth quarter, up 5.3% from the same period last year. The share of consumers taking on loan payments of $1,000 per month and above likewise reached an all-time high of 18.9%, up from 17.9% year-over-year and 15.9% during the final three months of 2022.

“It’s getting more and more difficult for the average shopper to walk into a new-car dealership and leave without a set of keys without feeling like they are forced to create extra room in their budget from some other aspect of life,” commented Jessica Caldwell, Edmunds’ head of insights.

Stocks enjoyed a strong 1.3% bounce on the S&P 500 as the broad index recouped roughly one-third of its post-Dec. 16 pullback, though rates continued higher with 2- and 30-year Treasury yields each rising three basis points to 4.28% and 4.82%, respectively. WTI crude remained on the hop at $74 a barrel, its highest since mid-October, while gold gave back about half of yesterday’s gains at $2,637 per ounce and bitcoin advanced above $98,000. The VIX sank to just above 16, down near two points on the day.

- Philip Grant

From the U.K. Telegraph:

Firefighters spend record amount on cats up trees

London’s flame-eaters dealt with 716 such feline arboreal incursions between Jan. 1 and Halloween, exceeding that of any prior full-year period. “The amount of cats needing to be saved by firefighters around London has more than doubled since 2020, and the cost to the taxpayer has almost tripled,” the Telegraph notes.

U.S. credit card firms wrote off $46 billion of bad debt over the first three quarters of 2024, reports the Financial Times, citing research from BankRegData. That represents a 50% uptick from the same period last year and marks the highest comparable nine-month figure since the Great Recession’s aftermath in 2010.

Though total consumer debt as a percentage of income ebbed to 82% as of Sept. 30 from 86% at the end of 2019 per the New York Fed, overall credit card balances reached $1.17 trillion in the third quarter, up a chunky 26% over the prior two years.

“High-income households are fine, but the bottom third of U.S. consumers are tapped out,” Moody’s Analytics chief economist Mark Zandi told the pink paper. “Their savings rate right now is zero.” 

Today’s divergent backdrop, driven by the ferocious post-Covid inflationary surge alongside zooming asset prices and a largely heathy labor market, spurs some cordons of corporate America to choose sides. “As we head into next year, 100% of our innovation will be at the medium and higher price point,” Chris Peterson, CEO of Newell Brands (manufacturer of products such as Krazy Glue, Sharpie pens and Mr. Coffee) told The Wall Street Journal last week.  “We’re not innovating at all [at] the lower price points anymore.”

Mushrooming government liabilities usher in a similar sea-change on Wall Street. Bloomberg points out that the roster of primary dealers (i.e., U.S. Treasury-designated counterparties who are obliged to bid in all auctions at “reasonably competitive prices”) stands at 22 firms, roughly half its 1988 peak.

Though a wave of industry consolidation partially explains the downshift, the fast-rising stack of marketable Treasury debt, which stands at $28.8 trillion, alongside a burdensome post-2008 regulatory regime, serves to diminish the appeal of that imprimatur for some industry players. Witness Citadel’s September decision not to pursue primary dealer status.

“Issuance has gone up almost threefold in the last 10 years and the anticipation is for it to [reach] $50 trillion outstanding in the next 10 years, whereas dealer balance sheets haven’t grown at that magnitude,” Casey Spezzano, head of the New York Fed-sponsored Treasury Market Practices Group, told Bloomberg. “You’re trying to put more Treasurys through the same pipes, but those pipes aren’t getting any bigger.”  

The likes of Citadel, Jane Street and Hudson River Trading – sophisticated electronic outfits who operate without the banking system’s post-2008 capital constraints – have duly stepped into the breach as market makers, yet that cadre may prove fair weather friends for Uncle Sam. “We’re now relying on principal trading firms to do a lot of the intermediation, but they’re. . . not obligated to make prices” in periods of turmoil, Vanguard senior portfolio manager John Madziyire observes. “I worry about the Treasury market.”

Out with the old, in with the new.  See “The race against compound interest” in the current edition of Grant’s Interest Rate Observer dated Dec. 20, along with “Disturbance in the weeds” in the Oct. 25 issue for more on the Treasury market’s precarious backdrop into 2025 and beyond.

Friday’s ADG featured a noteworthy typo, relaying the move in Japanese 10-year government bond yields to 1.11% represented their highest since 2021. Indeed, that figure marked a post-2011 peak.

Stocks reversed an overnight bounce to nurse a 0.5% loss on the S&P 500 with an hour left in the session, when your correspondent knocked off for 2024, leaving the broad index up by a shade less than 24% for the year.  Treasurys were likewise unable to sustain yesterday’s bounce with the 10-year yield hovering near 4.57%, while WTI crude climbed towards $72 a barrel and gold advanced to $2,625 per ounce. Bitcoin changed hands just below $94,000 and the VIX remained above 17.

- Philip Grant

Nobody beats the fizz? From The Wall Street Journal:

Robert F. Kennedy Jr. wants to take sugary drinks out of the shopping carts of food-stamp recipients. Coca-Cola, PepsiCo and Keurig Dr Pepper are mobilizing to stop him. 

Kennedy, the president-elect’s nominee to run the Health and Human Services Department, aims to remove soda and processed foods from federal programs such as the Supplemental Nutrition Assistance Program, also known as food stamps. The move could have big repercussions for the beverage industry.

Lobbyists for Coke and its biggest rivals are pressing their case on Capitol Hill, highlighting the fact that the soda companies are selling more zero-sugar drinks. These, combined with clear calorie labels on beverages, allow consumers to make healthier choices, they say. 

Gentlemen, start your engines. Continued economic growth is a cinch in 2025, Torsten Slok predicts, per the Apollo chief economist’s newly minted list of risks to global markets for next year. 

Tariffs, an earnings-related disappointment from Nvidia and a consensus-defying rate hike for the Federal Reserve each feature in that collection of so-called gray swans, though Slok assigns precisely a zero percent probability of a recession.

That eye-catching call evokes a recent exercise in misplaced certainty. Utilizing a model composed of 13 macroeconomic and financial indicators, a pair of Bloomberg economists concluded in October 2022 that the odds of a downturn over the following 12 months had reached 100%. Instead, quarterly GDP growth registered at a 3.2% annualized rate over the four quarters through Sept. 2023.

It’s a probabilistic world, though Tuesday does follow Monday – for certain.  

The fixed is in:  Global bond funds attracted a net $617 billion in the year-to-date through mid-December, EPFR-compiled data show, blowing past 2021’s near $500 billion haul to mark the largest full-year influx on record dating to 2007.  Investors’ shine towards the asset class is no fair-weather friendship, as the Bloomberg U.S. Aggregate Bond Index has eked out a 1.3% total return in the year-to-date, leaving its five-year performance at minus 1.4%.  Over those periods, the S&P 500 has returned 27% and 100%, respectively. 

 “U.S. equities have been sucking up flows like there’s no tomorrow, but as interest rates have normalized investors have started to move back into traditionally safer bets,” James Athey, a bond portfolio manager at Marlborough, told the Financial Times. “Inflation has come down pretty much everywhere, growth has softened pretty much everywhere. . . and that’s a much more friendly environment to be a bond investor.”

Fattening coupon income likewise brightens the backdrop, after 10-year Treasury yields climbed to 4.59%, their highest in more than six months and nearly double the 2.5% average level seen over the past decade. “The market views bonds as cheap, certainly relative to stocks, and sees them as representing insurance against an economic slowdown,’ Citadel Securities global head of rates trading Michael de Pass mused to Bloomberg. “The question is, how much to you have to pay for that insurance?” 

Memo to those of a bullish bent: See “the other side of the boat” in current edition of Grant’s Interest Rate Observer dated Dec. 20 for a look at one capital efficient way to position for lower rates ahead.

Meanwhile, the sharp post-Covid updraft in borrowing costs makes for an uneasy companion with today’s booming equity market backdrop, some observers believe. “The last time U.S. [valuations] were this high was in 2021 when the 10-year yield was a supportive 1%,” writes Société Générale global strategist Albert Edwards. “Any further rise in yields would be problematic for stocks."

Santa Claus is back in town, as stocks forged higher by a further 0.6% following Friday’s 1% bounce to recoup roughly half of steep selloff seen in the middle of last week. Treasurys remained under pressure with 2- and 30-year yields rising three and six basis points, respectively, to 4.34% and 4.78%, while WTI crude remained stuck just below $70 a barrel and gold edged lower at $2,613 per ounce. Bitcoin retreated below $94,000 and the VIX settled south of 17, continuing to rapidly retrace Wednesday’s spike higher.

- Philip Grant