Jarvo’s At it ::::

CHRIS JARVIS: A common theme that keeps popping up amongst bank strategy desks is comparing the recent move in US real yields to the taper tantrum. Consensus would argue that a large part of that move to higher reals is behind us – this seems to be neglecting some key pieces of information. A lot of the aforementioned analysis overlooks the main driver of higher US reals/lower breakevens during the 2013/4 period which was the TIPS liquidity premium adjusting higher (attached). Liquidity premium being purely a mechanism of confidence and the resulting positioning. Depressed liquidity premium is just telling us that positioning is crowded and confidence in higher inflation is extremely high which has been reinforced by Fed support in the form of QE (https://www.bis.org/publ/qtrpdf/r_qt2103x.htm ).

TIPS Liquidity premium still remains depressed at pre-taper tantrum lows and has approx 70bps to adjust back to the average for 10y duration leaving plenty of room for real yields/breakevens to move higher/lower.

It will be crucial to watch related markets where positioning is crowded and confidence is euphoric. The obvious starting points revolve around China where money flooded to over the last year and is in the process of peaking (attached GS FX Flows to China) while positioning long copper {CMXOCNCN Index GP <GO>} is also coming off extreme levels. USDCNH looks to be bouncing off the trendline mentioned yesterday while copper HG1 Comdty is still hideously range bound but momentum fading. Its been trapped in the middle of its range between 415-395 support at 407 and a break lower would be a great indicator that a correction is looming.