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author

Great questions

2 things: first, go read the bond primer linked near that comment. Second, inflation swaps and breakevens are going to move almost always in lockstep. Breakevens can be seen in Fred or via the RINF etf

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author

Yup you got it 👌🏻

Correlation could be neutral aka zero and there can be carrying strength you’d need to map against the strength of impulses

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got it. I'm still a bit confused as to how the Fed's actions fit into this framework. GIL regime gives 8 permutations and the Fed is responding to each of the GIL parameters via interest rate (which is itself not a constituent of the GIL complex, right?). However, the Fed's action itself (through interest rates) may alter the GIL parameters, right?

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Does 1 & 2 seem correct to you?

1) We are here: Growth Expanding, Inflation Falling, Liquidity Expanding

2) This is what market is hedging for/ projecting: Growth Contracting, Inflation Falling, Liquidity Expanding

You are saying that the market is over extrapolating #2 right? Hence, the 50 bps rate cut projections and hedging positions.

Also, how do you define and measure liquidity? Thanks.

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Excellent thread. Thanks

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Sorry, another question pertaining to your comment on inflation expectations via inflation swaps / bonds.

"Inflation is always going to be priced by inflation swaps and the breakeven component of the bond market. Even during 2021 when the Fed held rates below inflation (as reflected in the 2 year in blue), 10 year inflation swaps rallied and caused long rates to reprice."

(1)Prevailing inflation swaps fixed rate tells you market expectation of inflation rate over long-term. Ok makes sense. Wehre do you get this prevailing fixed rate, on Bloomberg?

(2) Is there some sort of parity between inflation swap rate and say US10Y? Should bond break-even inflation rate (nomimal - TIPS) = inflation swap fixed rate? Therefore, any change in inflation swap fixed rate necessarily reprices the nominal rate on say US10Y?

(3) "Even during 2021 when the Fed held rates below inflation (as reflected in the 2 year in blue), 10 year inflation swaps rallied and caused long rates to reprice" - I'm not entirely sure on the "even / but" logic here. Of course the Fed can hold short-term rates at negative (real) levels. What's the relationship between negative short-term rates and 10-year long rates repricing?

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In your examples of 2020 and 2022, is it appropriate to say that

- 2020: growth down, inflation down, liquidity down (before the massive COVID stimulus). Therefore, correlation was negative.

- 2022: growth up, inflation up, liquidity down. Therefore, correlation was positive.

Correlation is binary (either negative or positive) and we could map the type of correlation (and strength) based on the prevailing regime?

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