My 1st post on Marco, will just walk through the dashboards that I monitor on a bi-weekly to monthly basis.
Full disclosure, I do not trade on Marcos, however, they are useful to reflect market sentiments, and are the favorites of media attentions.
In short, the observation corresponds to what we are monitoring on specific securities’ price levels, not many bargains are available at this point.
Risk Free Rate Observation:
Best to pay / borrow at the short duration ends of the funding cost, while to earn at the long duration ends of the returns:
Short-term RFRs spiked over long-term ones, borrowers without debt-risk-premium could have borrowed at the long-tail & invested at the short-tail / bought back short-tail debts
Implied Equity Risk Premium as of Aug 12th 2022 (SP500, 2021 Earning)
The rising cost of debts across duration are making equity risk premium at this price level less appealing. Ideally, I’d like a 3 – 3.5% equity risk premium
US Corp High Yield Spread (High-Yield debt risk premium)
A great indicator, briefly spiked in end of June & early to mid July 2022, it’s now at below mean level
What does the future say?
Future market is expecting rate to go all the way to 3.9% end of 2022, then gradually to be cut starting from 3.75% in Q2 2023 to 2.6% in Q2 2025.
Central Banks Balance Sheet Monitoring
Covering US & CANADA,
Central Gov Debt
US Fed Gov level – $25.3 T, 1% increase on the interest rate, interest costs go up by $76 B conservatively (assuming 30% financed through short-end securities based on MSPD; New issuance would also be more expensive), in July, interest cost stands at 20.4% of the total gov receipts on a monthly basis & 13.4% on an annual basis.
Assuming interest cost takes up 20% of the total receipts, Treasury could afford $950 B interest cost, which translates to $290 B more room of interest cost, which translates to 290 / 76 = 3-4 times of 1% interest rate increases within a year.
Assuming interest cost takes up 17% of the total receipts (highest level in past 10-year), Treasury could afford $807 B interest cost, which translates to $147 B more room of interest cost, which translates to 147 / 76 = 1-2 times of 1% interest rate increases within a year.
Keeping in mind that the above did not account the new deficits that are accruing at 850 – 900 Billion annual level, which also needs to be financed by treasury securities. Treasury’s goal would be to inflate the debt burdens away through inflation, real rate would have to be pinned to the bottom or even negative. Nominal rate set by Fed would need to be lower than inflation to achieve this.
With the inverting treasury yield curve, Treasury could keep issuing treasury securities at the long-end at cheap & Fed could continue to raise the short end rate until reaching targeted interest cost to total gov receipts ratio, but not by much.
If some catastrophe / short-term shocks happened that gov needs to raise a lot of money again, Fed has room & reason & justification to bring down the short end interest rate and raise cheap debts again anchored based on that lower rate to solve the crisis.
