economics

It follows that the yield curve slope (through term premia) is an important barometer of where investors are in the liquidity cycle. In other words, a flattening (steepening) yield curve is unlikely to coincide with an expanding (contracting) Global Liquidity cycle.

This shows why changes in the yield curve slope tend to follow swings in the liquidity cycle. Consider the US liquidity cycle and changes in the slope of the US term structure in the next chart. Note that we have calculated an ‘average’ slope across all tenors so that the conclusion is independent of any one single maturity spread, e.g. 10-2 year.

In turn, Granger causality tests run over the past 40 years show no causation from Fed funds to long term rates (p=0.355 of no causation), but compelling evidence that long term yields drive policy rates (p=0.000). Using 3-month changes to reinforce this point, the probabilities are even stronger (respectively p=0.8521 and p=0.000).

It follows that

This positive impact of liquidity on term premia is channeled through the demand rather than the supply of bonds. This is because Treasuries represent ‘safe’ assets and declines in liquidity raise systemic risks sufficiently to trigger an increase in the demand for safety. Evidence their strong positive co-movement shown in the chart below. This

Two observations uniquely color our analysis of fixed income markets. These are non-consensus and likely controversial: • Short rates are determined by long rates, not vice versa (contrary to expectations hypothesis) • Long-term yields are largely affected by term premia, which, in turn, are positive liquidity phenomena (contrary to academic

Economics favors the second approach which splits yields into an ‘inflation protected’ real yield (TIPS) and an implied break-even inflation component. This can be useful, but because it ignores term premia, we find that, in practice, its conclusions are often mistaken especially when changes in term premia are an important yield driver.

TIPS And Term Premia The next level of bond analysis is to breakdown yields into their underlying components. There are two approaches. The approach favored in finance is to split the yield into: (1) policy rate expectations and (2) changing term premia. Term premia represent the extra compensation demanded by investors to hold interest rate risk

Summary • Carry = income return • Duration = interest rate sensitivity • Convexity = adjustment for curvature in price-yield relationship Note: For small yield changes, duration alone is accurate. For large changes or low-yield environments, always include convexity.

But "sell work" is the wrong business model for capturing that opportunity. It sounds like a paradigm shift, but it's actually a regression to the services economics that software was invented to escape. The frontier AI companies already understand this. They sell subscriptions that give customers access to intelligence-on-tap and let the customer