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A trade deal announced last night with Japan generated mixed reactions. Coupled with a disappointing election result over the weekend, this caused a significant rise in Japanese bond yields. We’ve previously highlighted the risks associated with rising rates in Japan, and overnight, the 10-year JGB reached a critical level. Tonight, we’ll see what happens next.
This 1.59% level for Japan’s 10-year yield is crucial, as a breakout from here could send rates sharply higher. The weekly chart suggests a potential move back toward 1.9%, a level not seen since June 2008.
This would significantly increase the odds of the spread between the 10-year Treasury and JGB narrowing below 2.8%, potentially declining toward or even into the 2.5% region. If the spread tightens to that extent, it’s doubtful USDJPY can maintain the 140 level.
The S&P 500 moved higher again today and remains in an unusually peculiar position. The 10-day realized volatility increased to 5.4% after briefly dipping to 4.5% around midday, while the 1-month implied correlation index dropped below 11. Historically, when realized volatility and correlation have reached levels this low, it’s typically been near market tops—at least dating back to 2023.
Again, I have been saying for a few weeks that around the time of the earnings, these patterns shift, and we start to see volatility and correlations rise. Maybe this year will be different, but in the past few years, it has been the case.
The SKEW index also climbed to about 160 today, which is becoming notably elevated.
Apologies for continuing to harp on the same stock market theme for nearly all of July, but I genuinely believe this has been the primary driver behind market dynamics since mid-June.
In the meantime, the Treasury General Account has likely bottomed and should begin moving higher from here. There’s considerable attention around this, especially regarding the impact on overall market liquidity once the process kicks off. Unlike in 2023, the reverse repo facility won’t play a major role this time, meaning reserves held at the Fed will probably decline. We’ll know whether—and when—this happens by monitoring SOFR.
-Mike
TERMS BY CHATGPT
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JGB (Japanese Government Bond): Bonds issued by Japan’s government, where the 10-year yield serves as a critical benchmark indicating investor sentiment and economic outlook.
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Yield Spread: The difference in yields between two bonds; here, specifically between the U.S. 10-year Treasury yield and Japan’s 10-year bond yield, impacting currency and investment flows.
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USDJPY: The currency exchange rate between the U.S. dollar and the Japanese yen, sensitive to interest rate differentials between the two nations.
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Realized Volatility: A statistical measure of actual historical volatility, indicating how much a stock or market index fluctuated over a defined period.
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Implied Correlation Index: Measures market sentiment by estimating the expected correlation among the constituents of an index; lower values suggest less correlation and heightened potential for market instability.
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SKEW Index: Indicates perceived tail-risk (the likelihood of significant market moves or extreme events); higher values imply increased market fear or hedging against downside risk.
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Treasury General Account (TGA): The U.S. Treasury’s checking account with the Federal Reserve, impacting overall market liquidity as fluctuations affect reserves within the banking system.
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Reverse Repo Facility (RRP): A Federal Reserve mechanism that temporarily removes excess cash from the financial system, helping control interest rates and liquidity.
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SOFR (Secured Overnight Financing Rate): A benchmark interest rate reflecting the cost of borrowing cash overnight collateralized by Treasury securities, used as a key indicator of market liquidity conditions.
This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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