What is the Discount Window?

The discount window offered by the Federal Reserve can be thought of as a program that allows banks to borrow money to meet their short-term capital requirements. It serves as a means for banks to quickly replenish cash that’s urgently needed.

• Fed Discount Window: https://www.frbdiscountwindow.org/

Reasons why banks use this program

• To ensure liquidity: to enable banks to meet customers’ withdrawal and lending needs.
• Smooth flow of credit: helps banks continue to lend money to people and businesses to support economic activity.
• Responding to unforeseen circumstances: to help banks manage liquidity issues even during market instability.

Types of Credit Available

• Primary Credit: A basic lending program for banks in good financial standing.
• Secondary Credit: A program with slightly stricter terms offered to banks that do not meet the requirements of Primary Credit.
• Seasonal Credit: For smaller banks with seasonal funding needs.

Cantom

Banks and similar financial
institutions wishing to use this service will be subject to a detailed financial health review.

Important Restrictions

• Redemption period of up to 90 days: banks may borrow from the discount window for up to 90 days.
• 60-day limit every 120 days: Banks that do not meet capital standards can borrow for a maximum of only 60 days out of every 120 days.
• 5-day limit for near certainty of failure: Severely undercapitalized banks may only borrow for 5 days from the date of becoming so.

Deposit of collateral securities when obtaining loans

When obtaining a loan from the discount window, banks are required to deposit securities as collateral. This establishes a guarantee for the loan. The collateral must be securities that meet Fed regulations.

Discount Rate and Interest Payments

Borrowings from the discount window are subject to an interest rate called the discount rate. This rate is set by the FRB and varies depending on the terms of the loan. The bank receiving the loan is required to pay this interest.

Dividends on collateral securities on deposit

When collateral securities deposited by a bank in a loan at the discount window generate dividends or interest, the proceeds belong to the bank receiving the loan. This mechanism allows the bank to continue to enjoy the income generated by the securities even though they are provided as collateral.

Case Scenarios

In this section, we will provide some examples to illustrate how banks use the Discount Window.

Primary Credit Case Scenarios

Scenario Overview

Bank A decides to use primary credit to obtain a $10 million loan from the Fed’s discount window. In this case scenario, the interest rate of the primary credit is assumed to be 5.5%.

Loan Details

• Loan amount: $10 million
• Interest rate: 5.5%.
• Term: 90 days (3 months)

Interest Calculation

• Interest = Loan amount x Interest rate x (Term/365)
• Interest = 10,000,000 x 0.055 x (90/365)
• Interest = 134,794.52
• Total Payment = 10,000,000 + 134,794.52
• Total amount paid = 10,134,794.52

Bank A pays $10,134,794.52 to the FRB when the loan is redeemed.

Secondary Credit Case Scenario

Scenario Overview

Assume that Bank B receives a $10 million loan from the Fed’s discount window through a secondary credit facility. Assume that the interest rate on the secondary credit is 6.0% and that Bank B is in less than ideal financial condition, so it will be subject to lending restrictions for up to 60 days within the 120-day period.

Loan Details and Loan Restrictions Applied

• Loan amount: $10 million
• Interest rate: 6.0%.
• Duration: Up to 60 days (within the 120-day term)

Interest Calculation

• Interest = 10,000,000 x 0.06 x (60/365)
• Interest = 98,630.14
• Total amount paid = 10,000,000 + 98,630.14
• Total amount paid = 10,098,630.14

Bank B pays $10,098,630.14 to the FRB when the loan is redeemed.

If a bank using secondary credit borrows funds from the FRB over a specific loan period (e.g., 60 days), there is a 60-day limitation period after the loan is redeemed before the bank can next borrow again. This restriction is designed to prevent banks from becoming overly dependent on loans from the Fed through successive borrowings and a subsequent prohibition on lending for a certain period of time.

Therefore, their cash management and liquidity planning must account for this 60-day limitation period when banks access loans. The existence of such a restriction is an important component of the bank’s liquidity management strategy.

Case Scenario of a Bank Unable to Repay in Serious Financial Situation

Scenario Overview

Bank C is facing a dire financial situation and will receive an emergency loan from the Fed’s Discount Window. However, Bank C has only five days to obtain the loan, so it decides to take out a $10 million loan.

Details of the loan and application of loan restrictions

• Loan amount: $10 million
• Interest rate: 6.0%.
• Loan term: 5 days

Interest Calculation

• Interest = 10,000,000 x 0.06 x (5/365)
• Interest = 8,219.18
• Total amount payable = 10,000,000 + 8,219.18
• Total amount due = 10,008,219.18

Therefore, at the end of the loan term, Bank C should initially be required to repay $10,008,219.18. The collateral value provided by Bank C was $9 million, and the FRB can recover $9 million from this collateral. This means that a total of $14 million is available, including the $5 million in cash that Bank C was able to provide. Thus, there was enough to cover the loan amount, interest, and a surplus.

Disposal of Non-Payable Amounts

1. Repayment and collateral execution: Bank C repays $5 million in cash and collects the remaining $508,219.18 (the $10 million loan amount plus $8,219.18 in interest minus $5 million) from the collateral.
2. Treatment of surplus: If the collateral is valued at $9,000,000, and the amount recoverable exceeds the required repayment amount, the surplus is, in principle, returned to Bank C. In this scenario, Bank C can repay the FRB in full, and a surplus is recovered from the collateral after repayment.
3. Further communication with the bank: If there is a surplus after processing the loan and collateral, the FRB and Bank C will discuss how to treat that surplus. This may include further steps to improve the bank’s financial condition.

Cantom

As we are not in a position to examine the
inner workings of a failed bank for detailed processing processes, this should
be taken as a rough outline of the process.

Conclusion

We have found that the Fed’s discount window serves an important safety valve function for banks and contributes to overall economic stability. Understanding the terms and benefits of loans, such as interest payments and dividends on collateral securities, is also important for understanding financial market movements; the BTFP, which became available for only one year starting in March 2023, makes this more flexible. By understanding how the discount window works, you will also be able to see how the BTFP works.

投稿 “What’s this ‘Discount Window’ thingy? It’s very important for saving banks running out of cash!” は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

When it comes to investing, finding options that offer both stability and growth potential is crucial for building wealth for the future. We confidently suggest the TLT (iShares 20+ Year Treasury Bond ETF) as an excellent choice for beginner to intermediate investors looking for steady growth.

Why invest in TLT?

TLT is an ETF that invests in long-term U.S. Treasury bonds with maturities of over 20 years, making it an ideal option for investors seeking stable returns from a long-term perspective.

Selection Reasons

1. Market Volatility Mitigation: During times of high market uncertainty or expected volatility, long-term Treasury bonds can serve as a haven in such conditions, offering a way to diversify portfolio risk.
2. Attractive Yields: Long-term Treasury bonds usually offer higher yields than short-term bonds, making them an attractive source of income for investors.
3. Interest Rate Risk Management: Investing in TLT is one way to manage interest rate risk from a long-term perspective. Incorporating long-term Treasury bonds into a portfolio as part of a long-term investment strategy can help diversify and smooth out interest rate risk over time.

Investment Product’s Website Link

• iShares 20+ Year Treasury Bond ETF (TLT)

Details on TLT

TLT offers investment focused on the U.S. long-term Treasury bond market. It’s an excellent choice for investors looking to achieve long-term capital gains and dividend income while minimizing risk.

Industry Positioning

TLT has established its position in the financial industry as a long-term investment tool. Especially when economic uncertainty increases, long-term Treasury bonds are often viewed as a safe haven.

Financial Condition and Growth Potential

TLT’s financial condition is directly linked to its underlying assets, the long-term U.S. government bonds. These are generally considered safe assets and tend to increase in value, particularly during times of economic uncertainty.

Dividends or Capital Gains

Investing in TLT aims for both dividend income and capital gains. The value of long-term Treasury bonds may increase over time, leading to capital gains.

Past Performance

The past performance of TLT varies with long-term financial market fluctuations. When interest rates fall, the value of existing high-yield bonds increases, and the price of ETFs like TLT tends to rise.

Investment Calculator

The calculation results assume that dividends are reinvested and interest rates and bond prices remain unchanged.

Risks

The main risk associated with TLT is fluctuations in interest rates. However, this risk can be mitigated by receiving dividends while investing from a long-term perspective.

Conclusion

TLT is an exceptional investment option that offers stable growth over the long term, making it a perfect choice for novice to intermediate investors. With its impressive safety, relatively high yield, and long-term growth potential, TLT is undoubtedly one of the most attractive investment vehicles, especially in macroeconomic conditions that are at the final stages of monetary tightening. Without a doubt, TLT is an excellent long-term investment option that you should consider adding to your portfolio right away.

投稿 What is TLT? Ideal for investors seeking long-term stable growth! (iShares 20+ Year Treasury Bond ETF) は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

The world of investing is vast, offering a myriad of options. However, in times of high economic uncertainty, such as now, stable investments become particularly appealing. Today, we suggest the BIL (SPDR Bloomberg Barclays 1-3 Month T-Bill ETF) as an investment option that combines stability and accessibility for beginner to intermediate investors.

Investment Proposal: Introduction to BIL

BIL is an ETF that invests in short-term U.S. Treasury bills. These government bonds mature in a short period of 1 to 3 months. BIL aims to track the performance of these short-term Treasury bills.

Reasons for Selection

• Stability: Since the U.S. government issues it, there’s a very low risk of default.
• Liquidity: As an ETF, it can be easily bought and sold in the market.
• Low Risk: The short maturity period makes it less susceptible to price fluctuations due to interest rate changes.

Website Link for the ETF

• SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) official site

Details on BIL

BIL offers specialized investment in the short-term Treasury market. It is suitable for investors prioritizing safety or seeking short-term cash placement options.

Industry Positioning

BIL has established itself as a safe investment option in the financial industry. Short-term Treasuries experience less fluctuation compared to stocks or long-term bonds and are considered a refuge during periods of market uncertainty.

Financial Condition and Growth Potential

BIL’s financial health is directly tied to its assets in U.S. government bonds, considered among the safest assets worldwide. In terms of growth, BIL focuses on tracking market yields rather than expecting significant growth, emphasizing the preservation of assets.

Dividends or Capital Gains?

Investing in BIL mainly targets income through dividends. Short-term Treasuries rarely generate capital gains, with the primary return coming from the interest on these government bonds. These dividends are typically paid monthly, allowing for the potential of greater returns through reinvestment in a high-interest environment.

Past Performance

The short-term Treasury market has generally provided low but stable returns. In times of financial crisis or economic uncertainty, investment in short-term Treasuries increases, raising the value of ETFs like BIL. Since it reflects the monetary policy of the Federal Reserve, you can expect stable income with extremely low risk from BIL during monetary tightening cycles. See the following monthly chart of Bill.

Investment Calculator

This simulation is based on a scenario where the yield rate won’t change and you reinvest dividends.

Risks to Understand

The main risk for BIL is interest rate fluctuations. When interest rates rise, the value of existing low-yield bonds decreases. However, the short maturity of the Treasuries BIL invests in makes it less affected by interest rate changes, allowing for potential growth in investment through increased dividends due to rising interest rates.

In Conclusion

BIL is an ideal option for beginner to intermediate investors seeking stable investments. Its safety, liquidity, and low-risk profile provide a suitable investment method adaptable to macroeconomic conditions or economic cycles. Why not start investing in BIL today?

投稿 What is BIL? An Option for Investors Seeking Stability and Peace of Mind! (SPDR Bloomberg Barclays 1-3 Month T-Bill ETF) は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Hello, this is Cantom.

Last week, bonds and crude oil performed strongly, while stocks had a directionless week.

Summarizing the performance of major trading stocks, the results are as follows.

• TLT: 108.53 (+2.29%)
• TBF: 20.67 (-2.18%)
• S&P500： 4105.03 (-0.10%)
• NDQ : 13062.60 (-0.90%)
• WTI : 80.70(+6.29%)
• DXY: 102.10 (+0.00%)
• USD/JPY: 132.16(-0.45%)

The better-than-expected unemployment rate on Friday helped put a stop to the decline in interest rates due to recession fears in the market. However, it can also be said that this was a technically predictable move. I will explain this in more detail through an analysis of the 30-year bond yield.

Cantom

The news of OPEC+ production cuts caused a surge in crude oil prices. It was determined that the medium-term downward trend in crude oil prices had been canceled.

Long-Term Perspective and Strategy

As of April 7, there is a change in outlook regarding crude oil.

We continue to maintain our long-term stance that the Fed’s interest rate hikes are coming to an end, and now is a good time to actively consider investing in US bonds.

In the medium term, we see the overall stock market continuing a gradual uptrend or forming a range, and we anticipate a full-fledged crash resuming around the time when the Fed begins to consider monetary tightening, likely in the latter half of 2023 to early 2024. The negative impact of a rapid monetary tightening will undoubtedly be felt.

We believe that central banks around the world have underestimated their influence. The high inflation rates since the outbreak of the pandemic have been largely influenced by unprecedented monetary easing, and the current interest rate hikes and QT are processes aimed at correcting this mistake. We think that repeating the same mistake with an opposite policy of rapid tightening is likely to occur this time.

Cantom

We also consider the possibility of bringing forward our scenario depending on the progress of the banking crisis starting from March 2023.

If we assume that the pattern will be the same as the past several decades, we believe that phenomena such as a collapse in commodity prices, a stock market crash, and a surge in the VIX will begin to occur around the time when interest rate cuts are approaching. In this phase, there is a possibility of making huge profits in a short period of time with inverse commodities. In 2023, focus on bond investments and reduce overall positions to prepare for opportunities. (If you do not engage in inverse trading, bonds will serve as a strong risk hedge.)

• The timing for purchasing bond ETFs is explained in this article.

We had assumed that crude oil would move within a certain range, but the technical level was broken due to OPEC+ production cuts. As there is resistance around 82, we believe that there is a high possibility of a rebound at this level, but attention should be paid to whether it will surpass this level or not.

Short-Term Perspective and Strategy

Now let’s explore if there are any short-term opportunities this week.

Major economic indicators

Key Points

Personally, I am paying attention to the CPIYOY announcement on April 12th.

The market expectation is 5.2%, but if the number is higher than expected, it is likely that interest rates will accelerate their rise. As the unemployment rate and inflation rate have a strong inverse correlation, it would not be surprising if the trend from last week continues. Unless there is a significant surprise, I believe that it will not be possible to continue the trend of declining interest rates from the previous week.

Key Fundamentals

As mentioned in this article, if we apply the same pattern as in the past, interest rate hikes will not end until the value obtained by subtracting the “one-month short-term bond yield” from “CPIYOY” becomes around minus 1. However, if we assume that the hike has ended with last week’s increase, it will not be realized unless CPIYOY records 4.0% or below. Additionally, it appears that the Fed is temporarily ensuring liquidity in response to the banking crisis, but I think this poses a high risk of becoming a concern for future inflation. They may continue to tighten by resuming QT in the future.

It is dangerous to assume that the Fed will easily loosen its grip on inflation given the low unemployment rate of 3.5% in the US.

Cantom

At this pace, there may be talks about the possibility of additional interest rate hikes until around June.

Technical Analysis

US 30-year bond yield

This is the daily chart. The trend of declining interest rates was reversed due to the unemployment rate announced on Friday being lower than expected. For the time being, the focus will be on how far the interest rate rise will continue. If you want to use this trend for short-term trading, TMV seems to be a good choice, but it is important to remember that the CPI will be announced on the 12th.

If the inflation rate is significantly slowing down compared to market expectations, it is possible to break the lower limit of the bear flag at once. In the short term, it may be a good idea to assume that interest rates will rise to around 3.75%. On the other hand, if the inflation rate remains high, there is a possibility that the uptrend will develop up to around 3.9%.

Cantom

It was confirmed this week that the interest rate rebounded at the lower limit of the bear flag. Technically, this can be explained on the chart, and there was also divergence on the 4-hour chart. That’s why I tweeted that we shouldn’t be too bullish and aggressive.

S&P500

This is the weekly chart. There is no major difference in the overall perception of the environment compared to last week. It is possible that the upward trend has reversed by breaking through the resistance line on a weekly basis, but it may be too early to be complacent as there is also a possibility of forming a head and shoulders pattern. Since rising interest rates put downward pressure on stock prices, even if there is a rising trend due to the low unemployment rate this time, I think it will be a small move. If you want to follow the bull trend, you should be cautious. Personally, like last week, it seems that the bond market offers a better risk and return environment.

Cantom

I also mix index investments with dollar cost averaging for my long-term strategy, but I recognize that it will be difficult to enter short-term trades next week as well, especially if there is an interest rate hike. Even if stock prices rise, the movement is likely to be sluggish.

USD/JPY

This is the 4-hour chart. Last week, there was a slight yen strengthening movement as we had anticipated. While a yen weakness trend is expected to develop against the backdrop of rising interest rates, we need to confirm the trend reversal of the Dollar Index (DXY) as a prerequisite condition. Since the US is approaching the end of its rate hikes, there is not much room for the widening of the interest rate spread between the short- to medium-term bonds of Japan and the US. If you want to bet on a yen weakness, it would be safer to enter after confirming the trend reversal of DXY, but a yen weakness is likely to be short-lived, so it may be a good strategy to take small profits. The level of 133.5 yen or higher depends on the results of the CPI.

Looking a bit further ahead, there is no change in the main scenario of a yen appreciation.

Japan-US 5-year bond yield spread

This is a daily chart. There have been no significant changes in the outlook, and it is highly likely that the trend has reversed due to the shrinking of the yield spread between Japan and the United States. As before, the key will be the “FRB’s expected end of interest rate hikes” or “the Bank of Japan’s expected start of monetary tightening,” but I believe that the recent banking crisis has led to the completion of a scenario where “financial crisis > FRB policy shift” is associated.

Cantom

Based on the larger trend, it’s currently seen as a small wave within the overall trend of a strengthening yen. Although it would be natural to take a bullish stance on the weak yen after the CPI results, it’s important to keep in mind that this would be a small fluctuation within the overall trend. In Japan, there has also been talking of a tax increase, which could have a tightening effect on the financial market. It’s probably best not to have excessive expectations for a weakening yen trend.

Crude Oil

This is a daily chart. The OPEC+ decision to reduce production completely destroyed the chart and scenario. It is necessary to switch based on the information at hand. For now, the medium-term downtrend has ended, but I don’t expect it to continue rising rapidly. With the window open and the Stochastic in a high area, I imagine a pullback to around 73 before forming an inverse head and shoulders.

Cantom

The decision by OPEC+ to cut production has put crude oil back in a state of backwardation. It’s time to start over and adjust the strategies accordingly.

Conclusion

I do not plan on taking aggressive positions until I see the CPI results, but short-term trading using the momentum from the unemployment rate is promising until the CPI announcement. It’s important not to take speculative positions without considering the data. Next week, I’d like to continue trading with favorable stocks.

I hope this information is helpful.

投稿 Weekly Strategy (2023): April 10 to 14 – A week ahead to confirm the momentum of the interest rate rebound. は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Hello, this is Cantom.

Last week, the bond market was balanced, while stocks and oil had a strong week.

Here are the results for some of the major trading stocks:

• TLT: 106.85 (+0.00%)
• TBF: 21.03 (-0.85%)
• S&P500: 3970.98 (+1.39%)
• NDQ: 12767.05 (+1.97%)
• WTI: 69.26 (+4.01%)
• DXY: 103.12 (-0.72%)
• USD/JPY: 130.71 (-0.85%)

After the FOMC raised interest rates by 25bps, the stock market soared. However, after the statement included hawkish comments, the stock market plummeted. Nonetheless, the market was very volatile, rebounding towards the end of the week. It was a week that showed the importance of having the courage not to enter the market during such significant events.

Cantom

On the other hand, I was too busy with my main job and did not actively make any positions. However, as planned, when the crude oil price hit 71, I made a short-term trade using the crude oil bear ETF, SCO. This trade closed at a gain of around 8%, but due to the small position, the growth of my portfolio was only about 2%. It felt a bit of a shame since crude oil was down nicely during after-hours trading.

Long-Term Perspective and Strategy

As of March 24th, there have been no significant changes in the overall outlook. We continue to maintain our long-term stance that the end of the Federal Reserve Bank’s interest rate hikes is near, and it may be time to consider investing in US bonds.

In the medium term, we expect the overall stock market to continue to experience gradual growth or range-bound trading and anticipate a significant crash to resume when the Federal Reserve Bank begins to consider monetary tightening. We anticipate this crash will likely occur in the latter half of 2023 to the early part of 2024. The negative impact of a sudden monetary tightening will undoubtedly be evident.

We believe that central banks around the world have underestimated their own influence. The high inflation rates since the COVID-19 pandemic are largely due to the significant impact of unprecedented monetary easing, and the current interest rate hikes and quantitative tightening (QT) are processes aimed at correcting this mistake. We think that if there is a sudden policy reversal in the form of significant monetary tightening, the same mistake will be repeated.

Cantom

We also believe that depending on the progress of the banking crisis from March 2023, there may be a scenario where our predictions are brought forward.

If we assume that the same pattern will follow as in previous decades after this rate hike, we believe that resource prices will collapse, there will be a stock market crash, and a surge in the VIX will occur when the time for interest rate cuts approaches. During this phase, there is a potential for substantial profits to be made in inverse commodities trading. In 2023, we recommend constructing a portfolio centered around bond securities, lightening the overall position, and being prepared for opportunities. (If not engaging in inverse trading, bonds can serve as a powerful risk hedge.)

We explain the timing of purchasing bond ETFs in this article.

Crude oil has finally broken through the range of 82-72 that it had maintained from the end of December to mid-March. This is a significant development that has broken the monthly range level. We anticipate that crude oil may fall below 50 dollars from late spring to early summer as the main scenario.

Short-Term Perspective and Strategy

Now, let’s explore any short-term opportunities for this week.

Major economic indicators

Key Points

Personally, I am paying attention to the unemployment insurance claims and GDP-related indicators to be released on March 30th.

I do not think that the data currently available is too bad, but it is difficult to judge until we see the actual numbers. If positive figures emerge, I expect there will be a more conscious tightening of monetary policy.

Key Fundamentals

As mentioned in this article, if we apply the same pattern as in the past, we assume that interest rate hikes will not end until the value obtained by subtracting “one-month short-term bond interest rates” from “CPIYOY” becomes negative 1. However, if we assume that the rate hike ended with last week’s hike, “CPIYOY” must not record below 4.0% to be realized. Additionally, while the Federal Reserve Bank appears to be temporarily securing liquidity in response to the banking crisis, this may become a concern for inflation in the future. It is possible that they may continue to tighten by restarting quantitative tightening (QT) at some point.

The US unemployment rate is still low at 3.6%, so it may be dangerous to assume that the Federal Reserve Bank will easily ease the inflation-crushing policy.

Technical Analysis

US 30-year bond yield

This is a weekly chart. It was once again rejected at the resistance level of the lower limit of the range. We recognize that a bear flag is being formed, but the fact that it was rejected this week suggests that we should be wary of a further rebound in interest rates. We believe that breaking the lower limit is only a matter of time, but there is a risk of being rebounded significantly once. If you want to take action, we think it would be better to use the US bond bear ETFs TBF or TMV. However, if you want to attack with a US bond bull, it is safer to wait for the break of the lower limit of the range or a trend reversal within the range. If we confirm a downward break, it will become easier to attack toward 3% or below.

Cantom

If interest rates rise from here, it could have a negative impact on stock prices.

S&P500

This is a 4-hour chart. Last week, it showed a volatile movement up and down between 3901 and 4039. It is difficult to predict the future, but this movement is understandable considering the unclear direction of interest rates. As I can see the possibility of an interest rate rebound, I remain bearish. If an interest rate rebound occurs, a decline to 3500-3600 wouldn’t be surprising.

Cantom

If the risk-off continues due to the bank crisis, it would be an exception, but generally speaking, a rise in interest rates leads to a decline in stock prices, while a fall in interest rates tends to result in a rise in stock prices, as per the theory. The situation is very uncertain.

USD/JPY

The weekly chart of USD/JPY is shown here. As analyzed last week, the pair dropped after hovering around 130.5 yen. The support line was broken, and the narrowing of the yield spread between short- and medium-term bonds continued, leading to a stronger yen. However, I still feel uncertain about the direction of the long-term bond yields, which also adds to the ambiguity of the direction of the medium-term bond yields.

Next week, it is important to consider the possibility of the direction remaining uncertain, or the confirmation of the bottoming out of a short-term trend. For the short term, unless a yen appreciation factor emerges from Japan or a renewed risk-off sentiment emerges, I don’t plan to enter short in USD/JPY. I made a yen appreciation call at around 136 yen, which has brought a profit of around 500 pips over three weeks. Until the next trend becomes clear, there is no need to be greedy.

Cantom

In the longer term, the main scenario remains for a stronger yen.

Japan-US 5-year bond yield spread

This is a monthly chart. I believe there is a high possibility that the trend of the shrinkage of the Japan-US interest rate differential has reversed. As usual, “the Federal Reserve Board’s forecast of the end of policy interest rate hikes” or “the Bank of Japan’s forecast of the start of monetary tightening” will be key factors, but I believe that the recent banking crisis has completed a scenario where “financial crisis> FRB policy shift” is associated. On the other hand, the market feels like it has priced in too much monetary easing. If a strong stance against inflation is shown at the FOMC, there is a high possibility that the interest rate trend will become volatile.

Cantom

The long-term outlook has not changed, but I think there may be a slight correction towards the end of the month and into early April. If the interest rate differential returns to a level above 3.65%, it may be worth considering shorting the USD/JPY while consulting with the chart (currently at 3.356%).

Crude Oil

Weekly chart. Last week, the price rose to 71.67, which matched the previous analysis of a potential rise to around 72. Although I believe the overall trend is bearish, there is a possibility of testing the upper limit of the band shown on the chart. If the price rises to around 75, I will consider shorting.

I believe there is significant energy built up in the market. My main scenario for the medium-term is that crude oil will continue to decline below $50.

Cantom

Regarding the analysis from the previous week, my call for a potential rise to around 72 was spot on. I have already taken profits from my short-term trades using SCO (around +8%), as I was aware of the possibility of a band walk as shown on the chart.

Conclusion

This week’s strategic policy remains largely unchanged from last week, with a focus on selling crude oil rallies. It is important to continue monitoring the direction of interest rates and trading in favorable stocks. I hope this information is helpful.

投稿 Weekly Strategy (2023): March 27th to March 31st – Will it be a week to determine the direction of interest rates? は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Last week’s summary: U.S. bonds down, U.S. stocks down, oil down

Hello, Cantom here.

Last week was generally weak for bonds, stocks, and oil.

The following is a summary of the significant issues traded.

• TLT : – 0.98%
• TBF: +1.14%
• SP500 : – 0.28%
• NDQ : + 0.43%
• WTI : – 4.01%
• USD/JPY: + 2.07%

The impact of rising interest rates and a stronger dollar continued to be a theme.

Cantom

Cantom entered TMF’s concise term on the reverse side of last week’s long-term interest rate triangle rebound and lost money but then switched to TMV and entered a short-term trade in SPXU, ending the week at about +3%. All positions for swing have been closed, and I now have a bond ETF for long-term holding purposes and a crude oil bear ETF for theory testing.

Mid-Term and Long-Term Perspectives and Strategies

As of February 17, when the article was being written, there has been no change in the outlook.

We maintain our long-term stance that the end of the Fed’s interest rate hikes is near and that it is time to consider investing in U.S. bonds actively.

In the medium term, we expect the overall stock market to trend slowly higher or form a range, with a full-scale crash resuming when the Fed will likely begin to consider monetary easing. We assume that this will probably be in late 2023 or early 2024. The adverse effects of sharp monetary tightening will undoubtedly be felt.

The high inflation rate since the Corona disaster was mainly due to the effects of the extraordinary monetary easing. We believe that national central banks have underestimated their impact. The rate hikes and QT currently underway are a process to correct that mistake. I think the same error will be repeated this time with a reverse policy of sharp tightening.

If we believe that the pattern after this rate hike will be the same as the past few decades, we will start to see a collapse in the resource market, a stock market crash, and a VIX spike around the time the rate cut approaches. Inverse instruments could yield considerable gains in a short period during this phase, so for 2023, build around bond issues and keep your overall position light and ready for opportunities. (Bonds are a potent risk hedge if you don’t trade inverse.)

• 債券ETF購入のタイミングはこちらの記事で解説しています

It should be noted that the forward contract in the crude oil futures market is in contango. This suggests that the market has high expectations that future supply will exceed demand. Be careful, as this could accelerate the price decline of crude oil.

Cantom

As for crude oil, rising long-term interest rates and a rising DXY (dollar index) are tailwinds. However, the contango has been contracting since Russia announced production cuts in the second week of February. Our long-term stance remains unchanged, but when trading crude oil in the current environment, it is safe to attack the market with a policy of selling the highs on the return. In the unlikely event of backwardation, it is safe not to force a short position in crude oil. Be aware that a weakening trend toward a stronger dollar could lead to a sharp rally.

Short-term perspective and strategy

So let’s continue to look for short-term opportunities this week.

Major Economic Indicators

Noteworthy Points

We are aware that there are not many major events this week.

I think it is better to focus on the technicals while paying attention to how long the momentum of rising interest rates in long-term bonds continues.

The S&P 500 and NASDAQ have been unable to fill the gap after opening a window and falling on Friday. It seems safe to confirm this window filling and then look at multiple hourly charts to see if the upward trend in interest rates and the downward trend in stock prices will continue.

Cantom

Interest rates have spiked, so I wouldn’t be surprised to see them test the return a bit. At the end of the week, I think we will see interest rates fall and stock prices rise before returning to their original tone.

Featured Fundamental

As we pointed out last week, market expectations seem tilted toward further rate hikes. As I wrote in this article, if we follow the same pattern as in the past, a rate hike will not be completed until the CPIYOY minus the one-month Treasury bill rate is around minus 1, so even if another 75 bps rate hike is implemented, it will not be realized unless the CPIYOY is below 4.5%. This is a very tough target to achieve. This seems like a pretty tough target, so it seems reasonable to assume that the trend of rising interest rates will not end quickly.

Technicals

U.S. 30-year bond

This is a daily chart. Since the price has been going up unilaterally, I feel a bit of fatigue in my skin sense. I am assuming a trend toward 4.0% after venting a little. Bonds tend to move straightforwardly. If the support line is broken, go with the flow.

• Bonds Bull ETFs: TLT、TMF
• Bonds Bear ETFs: TBF、TMV

Cantom

If housing inventories released on the 21st show favorable conditions, it will likely give impetus to higher interest rates.

S&P500

Daily chart. We started lower on Friday with a window, but we could not fill this gap and closed it with a large lower mustache. I think it is better to wait for a move up to around 4,100 ~ 4,130 and then sell back down. We should be aware that a move above the previous week’s highs could give the rally some momentum. With rising interest rates and a stronger dollar trend, I believe that the SP500 has some path for a downtrend, but if you are looking for a full-blown crash, consider entering after the SVXY trend breaks down.

Cantom

SVXY is a stock that shorts the VIX index. It has the characteristic of creating a gentle uptrend until a crash occurs.

USD/JPY

Daily chart. It has risen nicely, as analyzed, but the slow stochastics are showing signs of overheating. This is also a reflection of the sharp rise in bond rates. We should expect a band walk to develop here to test the return. We know that the uptrend is continuing, but it is not a gung-ho one, so keeping an image of taking small, steady waves and repeating profit-taking is essential. Next week, I think it is good to keep a down eye on the market until we see rising interest rates regain momentum.

Japan-U.S. 5-year bond interest rate differential

Daily chart. We continue to judge the situation as a reversal of the trend of narrowing interest rate differential between the U.S. and Japan. The main scenario for next week is to test a slight knock. Still, for the direction of limiting interest rate differential to occur, the key will be “the forecast of the end of the Fed’s policy rate hike” or “the forecast of the start of the BOJ’s monetary tightening.” Until such specific materials emerge, I think there is no problem with the weaker yen scenario.

Crude Oil

The strong dollar limited the upside. There is an impression that the downward pressure will likely weaken a bit because the contango has been contracting for the past two weeks, and the interest rate hike is expected to be braked a bit next week. On the other hand, technical sell signs are also starting to appear, making it difficult to make a decision: a weekly cloud twist has been occurring since the first week of March, and the charts suggest that a significant trend is approaching (the main scenario is a sharp decline on the strength of the dollar). I think it is better to focus on stocks such as bonds as there are more accessible options in the short term. This is based on the idea that if the entry decision is a gamble, the exit decision will be more difficult. When trading, we recommend short-term trades using 30-minute charts or similar.

Cantom

I am holding a long-term position to test the theory, but basically, my stance is to enter crude oil once in a while when I feel confident, take a small profit, and say goodbye.

Conclusion

This is another week to keep an eye on interest rates, but as in the past three weeks, it looks like it could be easy to get hurt if you are too hawkish about the one-sidedness of the market. I do not plan to trade immediately after the start of the week, but I will watch the trend of interest rates on long-term bonds and look for trading opportunities in TMV or SPXU.

I hope this post was helpful!

投稿 Weekly Strategy: Feb 20 – 24 は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Hi, Cantom here.

This article describes TBF and TMV, inverse-type U.S. long-term bond-linked ETFs. Unlike regular issues, inverse-type instruments are where the price of the base instrument rises when the cost falls rather than the other way around. Although they are inverse-correlated issues, they are not margin traded, so there is no risk of a blue sky loss if your prediction is off, as is the case with short-selling stocks.

Cantom

Please refer to this article for information on TLT and TMF, the standard bull U.S. long-term bond-linked ETFs.

What are the advantages of inverse U.S. long-term bond-linked ETFs?

Since they are the reverse versions of TLT and TMV, they have many similarities, but they generally offer the following advantages.

• Government bonds are the most informative investment instrument
• You will understand economic cycles
• You will understand the impact of interest rates on stocks and exchange rates.
• The moderate volatility makes it difficult for beginners to make a big mistake.
• Prices often rise in tandem with the inflation rate, making them easy to use for short-term trades using economic indicators.

About TBF

Officially, the product is designed to reflect the daily price changes of the ICE U.S. Treasury 20+ year bond in the negative direction by a factor of 1 (before expenses). As an investor, you can make an investment decision considering that the TBF is linked to the 30-year Treasury note, but note that the price of the TBF will rise when interest rates rise, and bond prices fall. It is better to use it for swing trading during increasing interest rates.

About TMV

This ETF is managed by Direxion, the same company that manages TMF. Like TMF, it is described as an inverse ETF that aims to convert daily price fluctuations of ICE U.S. Treasury 20+ year bonds into negative 3x (before expenses). In principle, this is a product suitable for day trading. From an investor’s perspective, there should be no significant problems if the product is perceived as a TBF with 3x leverage. It is important to note that this 3x movement is a target value and is calculated daily, so if the product is held for an extended period, the volatility will not simply be 3x that of TBF. As you can see from the chart, it is better to recognize that this type of product will surely lose if held for a long time.

Conclusion

It is a bit more advanced product than TLT and TMF, but once you can get on board with bull fixed-income ETFs, it would be interesting to include it in your trade candidates. Even looking at the chart without actually trading may give you trade ideas for correlated issues. On a related note, you may find the article “Interest Rates (1): Long-Term Interest Rates and Bond Price Fluctuations” helpful regarding investment timing for bull-type ETFs linked to long-term U.S. Treasury bonds. Please read this article for a logical image of long-term bond price movements.

I hope you find it useful.

投稿 Bonds Bear Etfs: TBF & TMV は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Hello, Cantom here.

We have delved quite a bit into bonds in our interest rate series, and I would like to explain how to read the USD/JPY exchange rate, which is popular among Japanese investors. Generally, in macroeconomics, we are taught that higher interest rates make a currency stronger in value. Still, it is essential to note that exchange rate determination is a relative matter. And mastering bonds (especially medium-term bond interest rate differentials) will significantly help you improve your ability to analyze exchange rates.

The biggest mistake forex traders make

Many use leverage to hold a currency for swap points because of its high short-term interest rate. However, as a general rule, we recommend that you consider that currency exchange is not an investment product suitable for long-term holding. This is because of the following reasons.

• Swaps quickly lose their advantage due to short-term policy rate changes.
• When interest rates fall, the swap almost disappears, leaving only a capital loss.
• In many cases, when interest rate differentials contract, it is during a period of monetary easing, which makes it impossible to invest in stocks and other attractive instruments if you wait until your positions appreciate.

How to read the trend of USD/JPY

Regarding the USD/JPY pair, following the medium-term bond interest rate differential trend between the two countries is more precise. As mentioned in the previous articles of the Interest Rates series, government bonds are investment instruments whose direction can be manipulated by central banks through their monetary policy changes. In a nutshell, the golden rule for investors is “Don’t fight the Fed.”

I will show you a chart created by subtracting the Japanese 5-year bond rate from the US 5-year bond rate, and the purple line is the USD/JPY rate, and you can see that it is following the trend nicely. In 2023, the US is expected to stop raising its policy rate. If we follow the pattern of bond prices bottoming out at the peak of the suspension of policy rate hikes, we can see the future direction of the dollar-yen rate.

Cantom

You may also understand why Cantom is purchasing more bonds in 2023. If you are chasing swaps in FX, policy rates will fall, and you could be stuck in a capital loss without any income from swaps. If you were leveraged, you could lose all of your money.

How to work with Forex

While FX is a popular investment product in Japan, Cantom recognizes that it is a product for professionals. We think it would be better to trade within a relatively short time frame without being tempted by the swap points.

If you choose FX as an investment product, make sure to trade with a clear understanding of whether the interest rate differential between 5-year Treasury bills is in an expansionary phase or a contractionary phase.

• The Japanese Yen depreciates ( for USD/JPY) when the interest rate differential widens.
• The Japanese Yen appreciates when the interest rate differential is shrinking (for USD/JPY)

I hope you find this article helpful.

投稿 Interest Rates (3): How to read the Japan-U.S. interest rate differential and exchange rate trends は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Hi there, Cantom here.

We know when the Fed’s monetary policy shifts are one of the essential things for an investor. In this article, we will introduce a couple of analytical techniques that I found effective in identifying the turning point of monetary policy – in this article, we focus on the end of tightening. This is similar to a sailor reading the currents, providing clues as to the means necessary to reach one’s destination (profit).

Historically, the end of the tightening period provides the best opportunity to invest in U.S. Treasuries.

Cantom’s Technical Analysis

This method is my analysis method. Back-testing over the past 20 years has confirmed its high accuracy.

The method is quite simple and uses the following formula.

• (“U.S. Consumer Price Index (CPI) YoY”) – (“United States 1-Month Bond Yield”)

And if we can confirm that the number here is in negative territory, we will consider the Fed’s rate hike to be over.

Let’s confirm this using an actual chart.

For this reason, we need to pay close attention to the CPI figures in the current environment as of 2023.

The U.S. BUREAU OF LABOR STATISTICS, which releases the CPI, has published a schedule for the year. It is worth taking a look at.

• Schedule of Releases for the Consumer Price Index: U.S. BUREAU OF LABOR STATISTICS

CME Fedwatch

You may be familiar with this very famous tool. You can get an idea of the consensus among market participants by going to the CME Fedwatch page and clicking on the Probabilities tab to see a schedule of expected changes in the F.F. rate. These estimates and probabilities change daily. You may want to be careful as it is merely market expectations.

• CME FedWatch Tool

How do you apply it to actual trading?

Since the investor’s response will differ depending on whether it is long-term or short-term, we will discuss each case separately.

For long-term trades

For long-term trades, you may consider holding a bond bull ETF such as TLT following the end of the policy rate hike. Sometimes people ask what about foreign currency time deposits, considering that interest rates are high now. Still, all warranties must be converted to the original currency to reinvest; the cost of exchange fees and currency fluctuations seem too costly. I think, however, it is a solid option if you are a U.S. resident making a time deposit.

On the other hand, holding fixed-income securities for an extended period has the advantage of receiving interest while aiming for a marginal gain and being able to reinvest the fixed U.S. dollars in stocks and other investments.

For these reasons, we think it is not easy to recommend foreign currency time deposits, which are not very profitable. (Normally, the value of a currency declines when bonds are rising.)

Cantom

In the U.S., people are sometimes concerned about the sharp rise in CDS due to the debt ceiling problem. Still, in FY2022, the announcement of the fiscal policy in the U.K. caused market turmoil and a sell-off of treasuries, which the central bank and the government quickly extinguished. We are not worried about default as the U.S. is “Too big to fail.” (In fact, October was the best buying month for U.K. bonds.)

For short-term trades

We would use technical analysis and watch CPI and other economic indicators to determine our response. For example, if CPI exceeds market expectations, we expect inflation expectations to rise, and a reaction such as “higher interest rates = lower bond prices” would be expected. Technical analysis is an excellent way to respond, but it is also a good idea to look at the economic calendar to understand event risk.

U.S. Economic Calendar by Market Watch is lovely on your bookmark list.

• U.S. Economic Calendar – Market Watch

I hope you find this helpful article.

投稿 Interest Rates (2): Finding When the Fed pivots. は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.

Hi there, Cantom here.

In this first article, which is commemorative, I will cover the interest rates and bond prices of long-term government bonds.

Although bonds might be most popular among professional investors, you can make excellent asset management decisions if you understand how interest rates and prices of long-term bonds work. This is simply because central banks like the Fed actively control them. There are also leveraged ETFs and other products, so it is a big plus to know how it works whether you are an investor who wants stable investments or a risk-selective investor.

This article explains the following items.

Long-term yields and bond prices

The relationship between yield rates and bond prices is quite simple.

• Higher rate = lower bond price
• Lower rate = Higher bond price

This is all you need to know.

If you want to know how this works, this article would be a great resource: “InvestopiaのBond Valuation: Calculation, Definition, Formula, and Example.”

Factors that may affect rates.

It would be fair to conclude that the most significant influence is the central bank’s monetary policy. On the other hand, market participants adjust their holdings when economic indicators are released, believing that such indicators may affect the central bank’s monetary policy. This, as a result, impacts demand and acts on bond prices. If demand for bonds is high, bond prices will rise, and interest rates will fall. Market participants look at various indicators to make decisions, but it is best to look at the CPI (inflation rate) and the unemployment rate. This is simply because the ultimate goal of central banks, especially the Fed in the U.S., is to stabilize prices and employment. These two goals are often referred to as the Dual Mandate.

When do long-term yield rates go up?

It is generally when long-term inflation expectations are high. The price of bonds rises sharply when the central bank tightens by raising policy rates or QT. And then, the yield rates peak at the highest point when the Fed pauses, knowing further tightening may destroy the economy. In other words, this is when bonds are at the lowest price. Central banks frequently disclose their monetary policy directions, so it is best to closely listen to them by checking their website or speech.

Cantom

You can see a beautiful pattern where the yellow line, the FF rate, is followed by the 30-year long-term yield rate. Simply knowing this may make you a successful investor.

In addition, higher interest rates hurt business activities. As the rates increase, stock prices become more volatile and are likely to decline. As a side note, it is good to know this coincides with lower economic demands, where commodity prices, such as crude oil, fall.

Monetary tightening is like reducing the amount of blood flowing through your body, so the amount of currency circulating in the economy will be less, where you can observe the currency appreciation.

Cantom

This long-term chart of DJI tells the impact of the Fed’s monetary policy.

When do long-term yield rates go down?

Central banks indicate they will ease monetary policy by lowering short-term rates to help the economy. The long-term yield rates immediately start to decline in reaction to the Fed’s indication of its policy change, where you can see the bonds’ price at the lowest. It’s a stage where long-term inflation expectations are low.

Around this final stage of yield rates’ decline, you can usually see prices of various assets bottoming out. You may even notice that the Fed was too late to save the economy, and in the worst scenario, there may be a massive crash commonly understood as demand destruction.

If you find it is around the last stage of tightening, noticing the long-term interest rates begin to fall, you may want to be very careful.

Cantom

This is a long-term chart of TLT, an ETF linked to long-term U.S. government bonds.

What to trade in each phase

It may not be too much to say, “Understanding bonds is key to becoming a successful investor.” However, it is not always easy for individual investors like us to invest directly in government bonds, and the commissions could be expensive. The good news is it is possible to invest in ETFs linked to the government or treasury bonds using investment management services such as Wealthsimple.

Typical ETFs linked to government bonds include the following

Bull ETFs (stocks that appreciate as bonds price go “UP”)

• TLT: Most standard ETFs related to U.S. long-term bonds
• TMF: Leveraged(x3) ETF for an experienced investor or trader

Bear ETFs (stocks that appreciate as bonds price go “DOWN”)

• TBF: Inverse version of TLT
• TMV： Leveraged(x3) ETF for an experienced investor or trader

Cantom

Holding TBF and TMV means you will be on the side paying interest premiums. These premiums will be reflected in their prices over time resulting in colossal decay and severe losses if held for an extended period. If you are dealing with these ETFs, it is advised to use them for short-term trades only.

I hope this article has helped you learn about bonds and the investment tools you can use. 2023 is the year when the Fed is expected to change its policy. It may be an excellent opportunity for you to start investing in bonds.

投稿 Interest Rates (1): Long-term interest rates and bond price fluctuations は Cantom Investment Strategy に最初に表示されました。

Copyright © 2024 Cantom Investment Strategy All Rights Reserved.