ArticlesMarket CommentaryA Lot of Hot Air?

A Lot of Hot Air?

hot air balloons in the night


  1. CPI nudged higher than expected, long term bonds underperform
  2. BoJ between rock and hard place
  3. Crypto companies face enforcement actions

Last week was decidedly odd. There was little news of economic substance other than CPI this morning, but the media was awash with helium-powered geopolitical machinations. Some find it a silly distraction while others view this as an omen of much bigger issues between China-US relations.

As for markets, we called for a breather last week, and indeed stocks tread water much of the week. The one asset class that continued dropping were longer duration bonds. Why?

Source: Yahoo Finance

Long Duration Bonds Underperform

This reflects the potential regime shift in yields that began with a blowout NFP. With CPI coming in higher than expected, this pushes out rate easing expectations for a few quarters and changes the balance of risks towards higher rates. 

Put simply, can 30-year yields be below 4% with another 500k NFP print? I don’t think so. So while CPI prints have been particularly volatile in recent months, the implications are for what the trend will be for the months to come.

In the front-end of the yield curve, markets have already moved decisively from 80% to nearly 100% odds of hiking for the next FOMC meeting.

Source: Atlanta Fed

BoJ Between Rock and Hard Place

It’s not a new problem, but it’s been accentuated by expected changes for the top role at the BoJ. Governor Kuroda is retiring after becoming the head of the BoJ nearly a decade ago. His tenure has been marked by decidedly novel and aggressive policies to get Japan out of its deflationary funk.

After nearly unlimited stimulus, bond buying, yield curve control and even stock buying, inflation has reared its head in Japan. Although some would argue, due to factors completely unrelated to the BoJ’s policies.

Regardless, while costs of goods have gone up, the hysteresis of low wage inflation has been difficult to tame. Despite pressures to raise rates to tame inflation, there is a bigger fear in Japan that if employers do not adjust their mindset and begin raising wages, Japan will be back to its deflationary ways in short order.

Another factor complicating issues is the fact that Japan has been running at 263% debt to GDP. Basically the highest amongst developed countries. So any rate hikes could exacerbate the government’s precarious funding situation and cause a lot of pain.

Japan is in uncharted waters. But it is an important development to watch as its issues portent the future of other developing countries that are aging rapidly and piling up a lot of debt. A successful pivot for Japan will serve as a blueprint for other countries. Its failure to handle the situation gracefully will definitely not go unnoticed.

Crypto Companies Face Enforcement Actions

While the SEC has been in the spotlight recently for enforcement action against Kraken’s staking-as-a-service which was deemed a security, the NYDFS has also been asserting its control over BitLicensed Paxos Trust.

Paxos is the issuer of BUSD, one of the main stablecoins used to trade on the Binance exchange. The regulator has ordered it to stop issuing BUSD. It is not objecting to Paxos’ ability to issue stablecoins, but is concerned about its relationship with Binance.

Meanwhile, in the more combative camp, Coinbase says it would fight the SEC regarding its own staking service if it were threatened by regulation.

Clearly the dust has yet to settle, so grab yourself some popcorn as we continue to follow this saga.

Ivan’s Take

The linkages between rates and equities are breaking. CPI came in above expectations and a volatile trading day ensued, but the bigger challenge that investors will face is that rates will no longer be the biggest driver of volatility going forward. In a few quarters from now when the Fed finally pauses rate hikes, investors will have to start evaluating assets based on their fundamentals again. 

As for crypto, it has held up surprisingly well in the face of recent enforcement actions. Blockchain usage is up and has been consistently high since the start of the year, driving ETH into deflationary territory.


Just as market participants flock to currencies with tighter monetary policies in the FX market, this is the beginning of a sustainable crypto fixed-income carry trade. Whether more investors jump into the market remains to be seen, but for now, crypto stands on its own. See you next week!

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