Merry Christmas and Happy Holidays!

Japan is an interesting case. The BOJ continues to normalize its policy and reduce the level of accommodation (as measured by real overnight rate). If they are on track to achieve their target of 2%, the policy rate will gradually go to 1.5-2%. The question is how quickly we go there.

In macro land, AUD rates are cheap and 10s has decent carry and roll, hedging is not expensive (for US investors). Their high beta to US rates has made them a difficult proposition. Inflation is still high and the RBA is not ready to cut yet, but the cycle has turned.

EM sovereign spreads are extremely tight as well, while we are not as tight as we were during 2006-07 period when we had the biggest EM and commodities bull run, the current level does not offer good risk premium to assume the risk.

Credit spreads are pretty damn tight, but it can stay tight for a while. Not much roll in the HY index but the 307bps spread is still hard to overcome unless you have a strong case for it to widen out.

And how should we think about the curve? Will the 2s10s trade north of 300bps when the Fed is done cutting rates for the cycle? Or are we going to break our collective brains when the curve trades as flat as pancakes?

Since my first tweet on Bluesky, we have discovered the sky was the limit with 30s making a local high of 5.18% and a local low of 3.89%. We have entertained the rise of term premiums and tightening of swap spreads. I am asking again, is the sky the limit (above 5.18%) and on what basis?

Is (blue) sky the limit for the 30-year bond yield or have we already seen the current cycle high?