Why the Biggest Risk in Finance is Inflation (and a rising 10Y Treasury Yield).

A thread.

Hint: it has to do with the ubiquitous Risk Parity framework.

1- We’ve already established that:

i.) inflation causes long term rates to rise (Points 1 & 1A in linked thread below);

ii.) long term rates rising could cause Growth to underperform Value (Points 2-2B).

But there’s a lot more to it than a sector rotation, as I’ll explain. https://twitter.com/bvddycorleone/status/1307350619875934208

2- The real danger of rising long term rates is that they can give rise to a simultaneous drop in stocks & bonds.

Needless to say, that would be the death knell for Risk Parity and the trillions of dollars in highly levered assets that are presently tied to it.

3- There already appears to be pressure on Treasury Yields to rise, but “intervention is holding them at an artificial level,“ for now.

As upward pressure on rates from inflation expectations begins to mount, we can expect the 10Y yield to spike up eventually: https://twitter.com/jessefelder/status/1314598517311143944

4- That this broad risk parity framework will blow up in due time and require massive Fed intervention is not a question of IF, but WHEN.

And when it does, that will be a bad day for all...

5- Note that in such a scenario, you certainly don’t want to be caught holding Ponzi companies that trade for 50x make-believe 2023 earnings (or anything of that sort...).

You’d want real assets.

6- And you’d want them soon, since risk parity is already getting a bit... wobbly:

Last 500 days, https://twitter.com/convertbond/status/1313263008395726848?s=21

The bond market isn't acting the way it 'should', https://www.forexlive.com/news/!/the-bond-market-isnt-acting-the-way-it-should-20200904

HT @hkuppy @Convertbond @jam_croissant @profplum99 @pineconemacro @GreekFire23 @vol_christopher @TaviCosta.

Thoughts/criticisms/feedback always welcome and appreciated.