Rates'n'Risk - Part II
Deep dive into the rates market and its application to Macro
I think the biggest mistake people make with the curve is treating it like a single object. “Yields are up” or “the curve steepened” sounds like information, but it’s usually not enough to trade. The curve is a distribution of beliefs about policy, about growth, about inflation risk, and about uncertainty.
When it moves, the first question I’m asking is not up or down? It’s which part moved, why that part, and what scenario does this reweight?
Part 1 (see below) was about building a repeatable read for any rates move. Part 2 is about turning that read into a scenario map. Because once you can map the curve to a small set of macro states, you stop overreacting to every print. You also stop making the classic error of getting the direction right but trading the wrong node/theme. A 10-year view expressed in the 2-year is a completely different bet. So is a Fed pivot view expressed in the long end when the move is actually term premium and supply.
Rates'n'Risk - Part I
I treat rates as the market’s primary “state variable.” If I can explain what the front end is pricing, what the curve is doing, and whether the move is being driven by real yields, inflation compensation, or term premium, I can usually explain the rest of the macro complex. Equities, FX, credit, commodities. Most of the time they’re reacting to the same underlying repricing, just with different sensitivities and different lags.
The way I do this is to split the curve into three jobs.
The front end is the policy path.
The belly is where the market wrestles with the cycle, growth rolling over vs holding up and where “terminal” expectations often show their hand.
The long end is a mix of long-run growth/inflation beliefs and a big, messy real-world component, term premium, supply, uncertainty, and duration absorption.
When I’m reading the curve, I’m constantly asking… Which job is doing the work today?
