Potential Further Yield Curve Steepening

Earlier this year I used the positioning in the 10-year bond to predict a rally which lasted for over 3 months. It ended recently as yields have risen about 35 basis points in the past few weeks. Now we’re at a similar point with the 2-year bond. As you can see from the chart below, the positioning is more negative than the 10-year bond was in March. The long positioning in the ten-year hasn’t abated despite the recent sell-off in the fast few weeks. This might mean the ten-year has further room to sell-off. A rally in the 2-year would cause its yield to fall and a sell-off in the 10-year would cause its yield to increase. This would mean the yield curve would steepen which is bullish for economic growth. It has already steepened 20 basis points in the past few weeks because of the sell-off in the long bond which I have discussed in previous articles. The 2-year yield is more effected by Fed policy than the 10-year because the Fed sets near term rates. However, we’re in uncharted territory now that the balance sheet is about to be unwound. This analysis is shallow in terms of looking at the economy and monetary policy, but it’s worth noting because when everyone is leaning in one direction, the dam breaks and a reversal occurs.

Ethereum Crashes

Speaking of the dam breaking, the price of ethereum has crashed. It’s down over 50% as it hit $400 on some exchanges a few weeks ago and is now down below $200. The size of the upturn is highlighted by the size of this decline because it’s still up about 4-fold in the past 3 months. The way initial coin offerings were banking on the speculation in ethereum without having proper business models made it obvious that this cryptocurrency would crater. There isn’t a central bank ready to bailout these firms and investors like in the stock market. As a side note, there was a flash crash in the ethereum because of a huge batch of selling. Some of those trades which sold the currency at pennies were refunded even though there wasn’t anything wrong with the trading platform. I am expecting ethereum’s price to fall further in the next few months because this entire industry of making money off speculation on top of speculation needs to crater. The technology developed by ethereum might be ground breaking, but that doesn’t mean that the valuations of companies using the capital raising process are close to the truth.