Good Friday AM,

Bonds are trying to bounce but so far it is weak.

Next week should be wild based on all of the news coming our way. It is the most important news week that we will see all quarter. The 4th quarter GDP read will be released the middle of next week and It will tell us if we are indeed moving toward recession. It is possible that a recession does not hit until the third or fourth quarter, but as you know every time the Fed raises rates he breaks something. Something will break and the banks were just the first warning. For now, let’s see if we get some follow through on this small bond improvement.

Next week you must be very careful.

CNN shared the results of a study showing that 5.5% may be the magic mortgage rate that gets things moving in the market, according to analysis from John Burns Research and Consulting, which specializes in the housing industry. It is great insight but with inventory declining with rates still with a 6 handle, my question is, what inventory will there be to buy?

And here is a little high-level insight into some broader bond market flows. The punch line is when money flows into bonds (green shoots on below graph), pricing improves on demand and rates drop.

Much has been made of the bond market’s standout volatility over the past few months. But for a small cohort of exchange-traded fund investors, it’s not enough. Assets in the 15 leveraged fixed-income ETFs trading in the US have climbed to $3.5 billion, Bloomberg Intelligence data show. The largest such product — the $1.6 billion Direxion Daily 20-Year Treasury Bull 3X (ticker TMF), which uses derivatives to deliver three times the performance of long-dated Treasuries — has absorbed more than $720 million already this year. That puts the fund on pace to eclipse last year’s record of $783 million. While the world of leveraged fixed-income ETFs has more than doubled since ending 2020 with just $1.4 billion in assets, the category actually used to be much bigger. At the end of 2013, the funds held roughly $7.7 billion overall, at a time when bond ETFs held just $254 billion versus $1.4 trillion currently.

The boom-and-bust is likely a result of a robust options market developing around the big bond ETFs, according to Bloomberg Intelligence ETF analyst Athanasios Psarofagis. For example, total open interest on the $35 billion iShares 20+ Year Treasury Bond ETF (TLT) currently stands at roughly 2.2 million contracts, compared to about 827,000 contracts at the end of 2013. Given that professional money managers are more likely to buy calls on TLT, for example, than buy a fund like TMF, the present-day revival in leveraged bond ETFs can likely be traced to retail traders, Psarofagis said. “I don’t think the fixed-income options market was as mature then. Bond ETFs tend to be more institutional, so they were using these, then slowly mapped over to options,” Psarofagis said. “I think the new money coming in is more retail, that’s why it’s to a lesser extent. I think bonds kind of became the new popular ‘meme’ stocks in a way.” Like meme stocks, it goes without saying that a triple-leveraged fund comes with eye-watering volatility. While TMF has gained 12.5% on a total return basis this year, that follows a 73% plunge last year and a 20% drop in 2021.

Please remain safe and stay healthy, enjoy the weekend, and first, make today great.