44 Comments

Great piece Kev

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Thanks Chase! Hope things are well with you my friend. I just got in from walking the dog and it's minus 10 and I can barely feel my legs, so I am more than a little jealous of your locale.

Take care and have a great night,

Kev

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Totally off-topic, but do you have any idea what is going on with smallcaps? Is TF just going to go up 2%/day perpetually now? Index is up 50% since November, just breathtaking.

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Ian - I got a post coming! Hopefully tomorrow! The move has been absolutely stunning. Don't forget that all the fintwit stars were telling us that large cap market weighted indexes would eat the world. Wow. Betcha they want a mulligan on that call.

Have a great night, Take care, Kev

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Hi Kevin,

Thanks for sharing your thoughts.

As I have just joined your newsletter, I am not sure if you already addressed this question. I thought someone like me as a retail investor can't play TIPS/breakevens except the etf, TIPS, which doesn't have leverage. But it seems you are doing it with IB. I would like to learn how you do that. Would you please share some details on IB products you are using or any links I can research?

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Hi Hugh.

Welcome to the 'tourist! Thanks for your support.

You can definitely trade all the instruments I mentioned in your Interactive Brokers account. That is where I currently have mine.

I have made a screenshot of the two instruments I mentioned:

https://1drv.ms/u/s!Av_wKZFdtnCKhqEOnW3n2hhBqqcXlQ?e=pFNB0v

The instrument number for the bonds is 912828Z37

You can see that there is a standard bid/offer.

The future I use is the Ultra-10-year. The root in IB is TN, and I use the March future.

Try putting those in and let me know if you have any problems or more questions.

Thanks for writing in!

Kev

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Also - here is the government website on how they work -

https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

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thank you for the IB cusip, Kevin!

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My pleasure Nick. Have a great night, Kev

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I'm watching incomes. I have gone back to the 1960's through present comparing commodity prices, personal incomes, productivity and CPI/Inflation.

Broad commodity prices have not lead inflation, nor reduced it. Commodity prices it seems have oscillated around personal incomes and, ultimately, cpi.

Conclusion: If commodity prices continue to rise without incomes rising, the only result, it seems to me, will be that people will buy less. Classic price/quantity supply/demand dynamics.

Interested in your thoughts.

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Hi Thomas,

Can you share some of your graphs? kevin@themacrotourist.com

I think that there will be no doubt that commodities going up will cause people to buy less of stuff, but don't forget - the government through fiscal is creating a lot more dollars. And before anyone says that we saw this in 2008 and there was no inflation - we didn't see this at all. We used monetary policy back then. This is fiscal. And it's different.

My gut says we do need incomes to rise for true inflation, but I am curious as to what you are seeing on incomes because everything I have seen shows that incomes have exploded higher recently.

Thanks!

Kev

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Hi Kevin

I want to make sure I fully understand to place the right trade. There are 2 ways to trade this

1) just buy the TIPS, or

2) buy the TIPS and simultaneously sell an equivalent amount of the long bond. This reduces the trade cost? and more closely tracks the inflation? any increased risk with selling the bonds as well in the case of a correction?

Thanks in advance

Paul

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Hi Paul,

If you just buy the TIPs, you are subjected to potential increases in nominal rates. So, let's say you buy the 30-year TIP at -1.12% yield. That means you will get inflation minus 1.12% over the life of the bond. Let's say inflation averages 4%. That means you will get 2.88% return.

But what if nominal rates go to 5%? Your TIP will go down, but it won't go down as much as the nominal bond.

That's why if you short the nominal bond, you are taking out the interest rate component, and merely exposing yourself to inflation.

You will only be subjected to the changes in market expectations about inflation, as opposed to also including the changes in interest rates.

Hope that helps.

Kev

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Don't forget, I think bonds will be an anchor around your portfolio's neck in the coming years/decades.

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Feb 13, 2021Liked by Kevin Muir

Thankyou

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thanks Kevin - in this case why not going long short end tips? is it because short end tips yields are way too negative so the likelyhood to have a negative return (after inflation) is almost certain?

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Flower Smuggler - one of the smartest big macro old investors I know recently told me that this what he has been telling people to buy - 2 year TIPS. And I have no trouble with owning them. The reason I don't is that I am so bullish on inflation, I want exposure for longer-duration inflation.

But, if you were only in the "reflation" camp as opposed to the "inflation" camp, then this trade would be ideal.

However, you are also correct in that 2-year TIPS are yielding -2.17%, so really, how much are you going to make? Maybe inflation ends up being 4%, so you make a shade under 2%. That's good, but I would rather benefit from the wholesale change in expectations about future inflation.

So, I am actually long 30-year TIPS. I hedge them with ultra bond futures, and then trade my steepeners seperately.

Hope this helps!

Kev

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Hi Kevin, for the amateurs here (maybe just me!): is IVOL a good way to play your TIPS theme?

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Hi Ron,

IVOL isn't bad, but it's much more complicated than just a pure inflation trade.

It's TIPS (without the short nominal) plus

long steepener options.

Really, RINF is the true ETF that most closely moves with inflation breakevens. Also - buying TIPS and shorting IEF also works.

Hope that helps,

Take care,

Kev

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Feb 12, 2021Liked by Kevin Muir

Thanks so much.

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Hi Kevin,

Great piece, thanks for the insights. What are your thoughts on a short NDX/QQQ position (puts maybe?) as another liquid proxy to the inflation trade? If real rates head north, I could see these positions coming in as well?

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Hi Nick. I have a piece coming on this topic, but yes - inflation will be the death knell for large cap growth stocks.

IWM over QQQ will be a theme for years to come IMO.

Thanks for writing in,

Take care,

Kev

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thanks for the article Kevin. it does seem like the inflation trade will have a pretty large headwind within the next 6 months because of the china credit impulse rolling over. https://twitter.com/sdypbuktkallman/status/1356970097097793539?s=20

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Aaron.

Thanks for the note. I do worry about China. Probably more than anything else.

As the same time, I am wary of not being long inflation breakevens because of China, but it's something I am watching closely. I don't think most investors give China nearly enough credit for moving global financial markets (something you don't suffer from obviously :)

Thanks again and have a great night,

Kev

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Kevin, I love the trade, esp the psychology as outlined in your last article on breakevens. I still have to ask you, why not also have a steepener on breakevens? https://zh-prod-1cc738ca-7d3b-4a72-b792-20bd8d8fa069.storage.googleapis.com/s3fs-public/styles/inline_image_mobile/public/inline-images/bfm6407.jpg?itok=GuAu38dS. After all, isnt fading more your style? ;)

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Ryan - I can 't disagree with you. My problem is that when it comes to inflation breakevens, I'm like Alex Gurevich. Alex's idea of trading the yield curve is deciding which part of the curve is he insanely long. He doesn't believe in shorting any part of the curve. :)

That's me with inflation breakevens. Hahahaha!

Seriously though - you bring up a good point. I am going to think about this some more.

But if I had to pick a part of the inflation curve to be long, it would be 30 years for sure!

Have a great night!

Kev

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your posts have made me realize that while I'm currently sitting on a load of puts in the 5-year due to their lower duration-adjusted IVs, I really need to move into the long end. May have to pay up for higher duration-adjusted IVs. The MOVE index has been super low lately, especially relative to VIX.

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Fixed-income vol is dirt cheap. I should be doing it all through options. Your comment reminded me of this fact. Thanks!

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ya shorting the short-term part will reduce risk drastically of some kind of new short-term economic emergency. Doesnt have to be full duration-adjusted size. Just a little hahaha. I dont have a BB. U mind citing me the best longest-term TIPs to buy in YTM terms and telling me the duration? From there I can figure out how many ZBs to short. Secondly, how do you feel about being long TIPs at negative real yield? Maybe just be better to be heavier on the short? Any insight into why real yields are so negative, and where real yields may be headed? If I were to add to your position the risk-reducing effect of going short breakevens on the short-term end (2 yr) w/ the risk-increasing effect of going extra heavy on the short bond side, the result is that you are short large ZBs, hedged w/ long 30-year TIPs and short small (in duration-adjusted terms) 2-yr TIPs (and not long any nominal 2-yrs).

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Ryan - sorry for the late reply.

Here is a spreadsheet with the TIPS you requested.

https://1drv.ms/x/s!Av_wKZFdtnCKhqR93JMqVQRpEIqNYA?e=6FuHp2https://1drv.ms/x/s!Av_wKZFdtnCKhqR93JMqVQRpEIqNYA?e=6FuHp2

I'll get to the other parts of the question tomorrow, but I just wanted to get this to you.

Take care,

Kev

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How about gold vs tips? Which one is better for inflation trades in your opinion?

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Good evening Sakura,

Gold and TIPS will trade differently. If I had to pick just one trade, I would choose the inflation breakevens because they are a more "pure" way to play inflation. Gold is a derivative of investors' fears of inflation (actually - fear of low real rates).

But I have them both. So, it's like asking me which of my children I like better. I can't do it. They are all special. :)

Have a great night,

Kev

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Novice to bonds here, do you have to constantly roll this to avoid the coupons and potential issues they might pose?

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Hi Raghav. Thanks for writing in. I roll the future every quarter. Technically I should be watching for slight changes in the hedging ratios mid-roll, but in the real-world, it doesn't matter enough. The TIPS issue I buy and just let cook.

If you bought the TIPS issue and shorted the nominal bond, you wouldn't need to roll anything.

Thanks - have a great night,

Kev

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Am sure most of y’all read Larry Summers comments. No sure if it is sour grapes for him not being appointed to Biden’s economic team or it’s his true call. Perhaps a little bit of both.

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Good evening Alden, Larry is such a blow-hard. I try to take the other side of all his trades. :)

But you are correct. We need to watch for pushback on the size of the stimulus. I think they are going to be screaming into the wind, but it's important to watch the reaction to their comments. I think that's more important than the comments themselves.

Have a great night,

Kev

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1) Why don't you use your pull and get the exchanges to list options on the RINF ETF so you can pull a "Kuppy" and sell weekly puts to subsidize your TIPS carry trade?

2)Please address my fear that the gov't can say what inflation is or adjust it for improvements in quality, etc. in how the mechanics of the TIP pricing works.

3)Isn't there some sort of tax consequences in the TIPs if you don't buy the new issue?

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Hi Alan,

1) You think I am way more powerful than I actually am. :)

2) So, I worry about that as well. I can't promise you that they don't change the rules, but it's probably not as arbitrary as you think. Don't forget that there are billions of dollars of financial instruments based on these indexes. I don't think it would be worth it for the gov't to monkey with it until there is real pain. Therefore, if they do change it, we will be well on side and we will deal with it then. That's my $0.02 about that.

3) I am not an American and my trading is all income, so I don't look at taxes the same as most investors. I am not sure about the tax issues. If anyone can comment, then please chime in.

Thanks for the great questions.

Have a good night,

Kev

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Reminds me of the zero coups in 1981...pretty great deal for 30 years... for a little retail piker like me...any etf pairings that could be matched similarly..? And while we're at it... u still luv regional banks as part of an inflation play..? BTW... loving the education...seems a bit more useful than Elon's & Cathy Wood tweets :-)

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Hi Paul,

Yes, I still love the regional banks. I probably like insurers even more, but that's pretty boring compared to slinging around GME and AMC. :)

Thanks for all the kind words. And watch for more ways to play this theme in coming weeks.

Take care,

Kev

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Link to an old post by Kevin -> https://medium.com/@kevin_640/inflation-breakevens-a-core-holding-3849869ab041

You can play the 7-10y inflation breakeven with the TIP/IEF ETFs.

Cheers.

Reda

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Thanks Reda! I should have mentioned that. I appreciate you highlighting that spread (TIP vs. EIF).

(and unless I am mistaken, this might be your first comment. Welcome to the group and thanks for the helping out).

Have a great night,

Kev

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Excellent piece - esp for a day when the long end bond yields finally are taking a breather

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Thanks hnk! Have a great night, Kev :)

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