Interest Rate Report: Duration, TLT, and the macro cycle

Where is the duration risk curve at?

This report will provide a detailed update on the current situation with interest rates across the curve, where they are likely moving as we progress into the end of 2024, and how this will impact other asset classes.

I have laid out the macro tensions and variables in the following reports:

• Equity Report: Link

• Comprehensive Macro Report: Link

• Alpha Report: Rates, Equities, Catalysts: Link

• Critical Signal: Rates and Equities: Link

• All My Equity Signals/Research YTD: Link

• Current Trades: Link

• Trades/Week Ahead: Inflation and Rates: Link

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Big Picture:

I recently shared this chart on Twitter (link) and I want to break down the logic of it for you. First, the colored background shows the momentum regimes. Why does this matter? Over the past 2-3 years, the long end (ZN or TLT) has been in a negative momentum regime.

Momentum is always directly connected to the macro impulses taking place in markets. While many people get bogged down by noise on an intraday basis, it’s important to remember how momentum is functioning on a cyclical basis. The way to make outsized returns is by putting on large leveraged trades that you hold for prolonged periods of time.

The problem is that everyone has become a short-term momentum trader. This section of a book pushed me to really think about why you get paid to hold risk: Link.

With this being said, bonds are currently in a negative momentum regime where the risk-reward is no longer skewed to the downside. On top of this, volatility is beginning to compress (see bottom panel). This is key to note because complex systems in their nature move from compression to expansion of volatility.

For cyclical changes, you want to see the collocation of compression in volatility as the fundamental risk-reward shifts its skew. From here you want to connect it to specific catalysts on the calendar to begin establishing a position. This is what I will break down below.

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Macro Inflection: