A Fresh Look At Bond Markets

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Looking back at the 2015-2021 period when I traded bond markets at a large bank, it was quite boring.Rates were mostly stuck around 0% at the front-end, and to make money you had to find small dislocations and monetize them with leverage hoping volatility would remain low forever.Today, the story is different: bond markets are truly exciting.So let’s have a fresh look at them.Before we do that though - an important announcement.My macro hedge fund Palinuro Capital is going live in January.This is a dream coming true for me.Do you want to be updated about the performance and progress of my hedge fund?Fill in the form below and I will include you in the distribution list:Update Me On Alf's Macro Hedge FundI expect the Fed to cut rates again in December.Why?See the chart below:Even after the recent Fed cuts, today’s Fed Funds (orange) are still markedly above the underlying trend of core PCE inflation (blue).The Fed is a simple animal: their dream is to have a stable labor market with predictable inflation.And today, the main risk they see isn’t an inflation pick-up.Instead, risk management forces them to protect the US economy against a deterioration in the job market.Running a real Fed Fund rate (bottom chart, black) at +2% for several quarters on end is an exercise which was last performed in 2007.I don’t think the Fed sees major benefits in running such a tight policy.Hence, I believe they will cut rates by 25 bps in December.But here is an argument for them to feel confident the US doesn’t need a major cutting cycle in 2025:This chart looks at the US private sector (orang…