Asset Class Report: Bonds and FX
The constraints, capital flows, and drivers for macro
FX and bonds are two of the cleanest expressions of global macro trading. No one cares about bonds or FX until their volatility begins impacting equities. Just think about how no one cared about interest rates until 2022. Now everyone can’t stop talking about it!
FX Primers:
I have written educational primers on every major aspect of global macro including bonds and FX:
Research Synthesis / Direction Of Capital Flows Substack
Hello everyone, There has never been a time in history when understanding the world from a global perspective and interpreting it accurately paid such a high premium. Since the very beginning of this Substack, I have talked about the nature of the time we live in and how to act intentionally in it.
Previously, all of the FX primers were behind a paywall. Since we are at such a pivotal point for FX, I have taken the paywall down so that everyone can access it! Don’t ever forget how education actually works:
“You wasted $150,000 on an education you coulda got for $1.50 in late fees at the public library.”
FX Primers:
Equities: as a reminder, follow my partner
. We work together closely connecting the macro insights I have with his institutional experience in trading single-name equities.
The Big Picture:
We continue to be in a macro regime where implied volatility in the FX market is making a pronounced and persistent move down. This is due to the fact that we aren’t seeing a significant macro impulse on a cyclical basis that squeezes positioning:
On top of this dynamic with FX, bond volatility is falling with significant momentum:
The collocation of falling FX and bond-implied volatility creates two unique tensions that need to be considered when either analyzing or trading these assets:
First, falling volatility allows managers to put up more risk and use more leverage for expressing views. The fall in volatility is directly connected with financial conditions becoming looser across all assets.
Second, this compression of volatility will create the preconditions for the next inflection point driven by a macro impulse. Since inflation continues to trend down, growth remains resilient and liquidity is plentiful, we arent seeing the incremental probability of an inflection point increase right now.
These two points set the context for the specific insights I want to cover in bonds and FX as we move into April.
(Housekeeping note: The window of time for locking in the paid tier at $50 a month is now over: Link. The alpha sharing won’t stop and we will be moving forward together!)
Bond and FX Implied Pricing:
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