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US Bonds OVERVIEW

9

th

Dec 2015, by Daniel J. Want

Perspectives on US Treasury Bonds

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of clients or potential clients of Prerequisite Capital Management PtyLtd. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument.The views expressed are the views of Prerequisite Capital Management Pty Ltd through the periodending at the date of publication and are subject to change at any time based on market and other conditions. References to specific securities and issuers are for illustrative purposes only and are notintended to be, and should not be interpreted as, recommendations to purchase or sell suchsecurities.

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prerequisite

.com.au/

research

All rights reserved. Past performance is not indicative of future results. The views expressed are the views of Prerequisite Capital Management Pty Ltd through the period ending at the date of publication and are subject to change at any time based on market and other conditions. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

Context:

Positive for the US Bond Market

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I. Deleveraging has hardly started:

Both in the developed world and Emerging Markets.

II. Capital Misallocation & Oversupply:

Caused by (a) the cost of capital being held too low for too long, (b) policies that have caused

saving & investment (global current account) imbalances to persist much longer than they naturally would have persisted

III. Demographic headwinds:

Aging populations etc

IV. CAPEX peak and credit conditions tightening:

Escalating credit spreads, lending officer surveys show tightening standards for Commercial loans

V. Turn in the Earnings Cycle:

Profits and margins starting to compress globally and in USA.

VI. Tide going out on Buybacks:

Growing recognition of corporate irresponsibility

VII. Global Capital Flows shift:

Material regime change in pattern of capital flows last 12 months potentially representing an unwind of the last 7-15 years, engendering instability especially in Emerging Markets (highly elevated risks of banking crises & other shocks in the seasons ahead). Global trade also weakening strongly.

VIII. Prevailing expectations towards higher yields:

ZEW survey related inflation and interest rate expectations at peak optimism, ‘late

-

stage’ bear market psychology towards key commodity markets still

absent(with vicious supply dynamics still reinforcing to the downside particularly in energy and industrial metals)

IX. Velocity still falling (both structurally and tactically):

broader liquidity still tightening globally (overwhelming liquidity supply)

X.

‘Speculative’

Positioning remains substantially negative towards Bonds:

stronger ‘commercials’ persistent in multi

-year accumulation of Treasuries.

‘Late

-stage

’

bull market psychology towards multi-decaderise in Bonds still absent(& under-owned)

XI. Geopolitical Escalation

and increasing trade barriers growing at the margin.

XII. Fed & Central Banks backed into a corner:

trapped by excessive reliance on low interest rate policies (last couple of decades) and

QE (over the last 7 years), unable to unwind such programs due to the extreme fiscal constraints of both the public and private sectors.