<p>Good morning and welcome back to The Macro Compass. This is Alf writing.</p><p><strong>It’s almost been 3 years together now - and I loved every little bit of it.</strong><br />I treasure each and every supportive comment you threw at me, and vividly remember hitting 100,000 subscribers and jumping out of joy. We are now 150,000+. It’s crazy.</p><p><strong>But.</strong></p><p>As I run two businesses now (my hedge fund Palinuro Capital and The Macro Compass), <strong>I need to focus on my customers even more.</strong></p><p><em>So today I am asking you to become one.</em></p><p>Here is why:</p><p>A) You will read my macro insights <em><strong>multiple times per week</strong></em></p><p>B) If you are quick, you get <em><strong>40% OFF. Locked in forever.</strong></em></p><p>C) This could be it. <em><strong>Next year we might close to new subscriptions.</strong></em></p><p>Yes, you read it correctly. <br />As we are getting a large influx of institutional demand, next year we might be closing subscriptions at retail-friendly prices.</p><p>This is why today I am telling you: <strong>go for it.</strong></p><blockquote><p><em>The first 50</em> TMC readers who will use the <em><strong>code BLACKFRIDAY</strong></em> for our All-Round tier (multiple research pieces per week) will get <em>40% OFF forever.<br /></em>You’ll end up paying only <em>EUR 749/year.</em><br />That’s ~60 bucks a month to read my macro insights almost every day.<br />The offer is valid only for <em>3 days.</em></p></blockquote><p>Use the link below. Be amongst the 50 who get in:</p><p class="button-wrapper"><a class="button primary" href="https://buy.stripe.com/8wM5kz2hD2Qd9Hy6os"><span>Claim Your Spot</span></a></p><p>Now, to the piece.</p><div><hr /></div><p>The Bond Market is saying “This Time is Different”.</p><p>The Term Premium is on the rise, and it now sits close to the highest level for the last 10 years.</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F4745d6ce-5eb2-4cc1-9357-8920941d769e_618x421.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="495.93527508090614" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F4745d6ce-5eb2-4cc1-9357-8920941d769e_618x421.png" width="728" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>But What is Term Premium?<br /><br />An investor looking to get fixed income exposure can do that via buying 3-month T-Bills and rolling them each time they mature for the next 10 years.<br />Alternatively, it can decide to purchase 10-year Treasuries today.<br /><br />What's the difference?<br />Interest rate risk!<br /><br />Buying a 10-year bond today rather than rolling T-Bills for the next 10 years exposes investors to risks – term premium compensates for this risk.<br />The lower the uncertainty about growth and inflation down the road, the lower the term premium and vice versa.<br /><br />Uncertainty is the key word here! <br />The higher the uncertainty about future growth and inflation, the higher the term premium.</p><p>The left chart below shows how term premium (y-axis) increases with a higher dispersion of forecast (read: uncertainty) for inflation (x-axis):</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Faa3de88a-9f2b-45c1-9f37-122fc2c51747_593x401.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="401" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2Faa3de88a-9f2b-45c1-9f37-122fc2c51747_593x401.png" width="593" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p><br />Today the estimates of the US Term Premium have moved higher and they are now testing the upper side of recent ranges: in other words, there is some more uncertainty being priced in about the path ahead for growth and inflation.</p><p>Investors are less confident about a future of predictably contained inflation and growth, and they expect some more volatility and uncertainty down the road.<br /><br />As we approach US elections, bond markets are telling us - yes, “this time is different”.<br />Persistent fiscal deficits regardless of who wins US elections can lead to more volatile inflation backdrops, and to more boom/bust cycles.</p><p>But as Term Premium is on the rise, should we fear the return of Bond Vigilantes?<br />Not so fast.</p><p>This week, Bond Vigilantes are in action in the UK: the fiscal budget unveiled by the new UK government has been assessed as ‘‘too loose’’, and therefore investors are going after all UK assets - they are selling GBP, selling UK bonds, and even stocks.</p><p>Bond Vigilantes are truly in action when they initiate a sell-off in bond markets to impart discipline to policymakers, and they hence generate a spill-over effect to the currency and potentially stock markets too.</p><p>But the US is not the UK.</p><p>Over the last 40 years, Bond Vigilantes have NEVER been in action in the US:</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2288d18d-05ef-4237-8901-1743907fbf74_1344x840.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="455" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F2288d18d-05ef-4237-8901-1743907fbf74_1344x840.png" width="728" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>Over the last 40 years, we never really had investors puking on US assets - true Vigilantes are in action when both bond yields go up, and the USD goes down. <br />As you can see from the chart, that quadrant is basically empty. </p><p>We are instead experiencing people pushing US yields higher and the USD getting stronger. The bond market is hence sending a different message. </p><p>''Trump's policies will be stimulative for nominal growth, and the US will grow faster than other countries''.</p><p>Additionally, investors are hedging for a scenario in which rates move up fast via options. This is evident in the so-called ''skew'':</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" href="https://substackcdn.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F7a7c9847-9ebb-4f18-818a-95fdbf37c56a_521x290.png" target="_blank"><div class="image2-inset"><source type="image/webp" /><img alt="" class="sizing-normal" height="405.2207293666027" src="https://substackcdn.com/image/fetch/w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F7a7c9847-9ebb-4f18-818a-95fdbf37c56a_521x290.png" width="728" /><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg class="lucide lucide-refresh-cw" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg class="lucide lucide-maximize2" fill="none" height="20" stroke="currentColor" stroke-linecap="round" stroke-linejoin="round" stroke-width="2" viewBox="0 0 24 24" width="20" xmlns="http://www.w3.org/2000/svg"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>This means investors are willing to pay more for bond puts than for bond calls for the next month. </p><p>This is unusual: investors normally pay more for ''insurance premium'' (bond calls) than for puts, so this is related to election hedging.</p><p>There are no ''Bond Vigilantes'' in action here. <br />Instead, the bond market is preparing for a Trump victory and for policies that will be stimulative for growth and inflation.</p><p>Yet, history shows us this.</p><p>Elections are a powerful short-term volatility event.<br />But macroeconomic cycles tend to prevail over time.</p><p>Trump was the President in 2019 as well, but as the global macroeconomic cycle was weak 10-year Treasury yields traded as low as 2%.</p><p>If Trump secures a sweep, I expect the bond sell-off to accelerate.<br />Your mother and your dog will tell you to sell bonds at 4.50% yields.<br />That’s when you should consider buying them instead.</p><p>And don’t forget: today you should <strong>go for it.</strong></p><blockquote><p><em>The first 50</em> TMC readers who will use the <em><strong>code BLACKFRIDAY</strong></em> for our All-Round tier (multiple research pieces per week) will get <em>40% OFF forever.<br /></em>You’ll end up paying only <em>EUR 749/year.</em><br />That’s ~60 bucks a month to read my macro insights almost every day.<br />The offer is valid only for <em>3 days.</em></p></blockquote><p>Use the link below. Be amongst the 50 who get in:</p><p class="button-wrapper"><a class="button primary button-wrapper" href="https://buy.stripe.com/8wM5kz2hD2Qd9Hy6os"><span>Claim Your Spot</span></a></p><p>Enjoy your weekend,</p><p>Alf</p><p></p><p></p>