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BespokePremium.com © Copyright 2021, Bespoke Investment Group, LLC. Bespoke Investment Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

Transatlantic Inflation Impulse While the US inflation outlook is getting lots of attention, there’s a similar dynamic playing out in Eu-

rope. Producer prices have surged to record highs on a YoY basis, though commodity prices suggest

those will start to slow soon. Consumer prices are less consistently influenced by commodities, with an

r-squared about half as large as that of PPI relative to commodity prices in EUR.

Using a simple model of unemployment rates, commodity prices, and consumer price expectations

from monthly European Commission consumer confidence surveys, we can generate a respectable

model for Eurozone harmonized index of consumer prices (HICP) inflation. That model (bottom left

chart) suggests prices will not peak for at least another three months, and perhaps longer. With that in

mind, the fact that 10y Eurozone HICP swaps closed above 2% for the first time since 2013 shouldn’t be

much of a surprise. Like US inflation swaps, Eurozone consumer prices derivatives are overly-correlated

to oil price level changes, but we can still see an impulse in relative inflation. The recent uptick in infla-

tion is arguably even more severe across the Atlantic than in the US, despite a very different COVID

policy response.

EZ Producer Prices Are A Function Of Commodities Consumer Prices Are A Less Direct Commodity Story

Eurozone Inflation Likely Has Yet To Peak EZ HICP Swaps: Finally Back Over 2%, More To Come?

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60 Bloomberg Commodity Spot Index, EUR,Monthly Avg, YoY % Change, Adv 3m

Eurozone PPI YoY

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60 Bloomberg Commodity Spot Index, EUR,Monthly Avg, YoY % Change, Adv 3m

Eurozone HICP YoY

R-Squared = 0.64 R-Squared = 0.34

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Eurozone HICP YoY

Modelled

R-Squared = 0.77

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EZ 10y Inflation Swap

EZ 10y Inflation Swap - US10y Inflation Swap

of 7 The Bespoke Fixed Income Weekly 10/6/21 BespokePremium.com


Treasury Yields, Prices, and 30 Year Fixed Mortgage Rate

National Average 30 Year Mortgage Rate (%)

30 Year Treasury Future (Price, Roll Adjusted) 30 Year Treasury Bond (Yield, %)

2 Year Treasury Future (Price, Roll Adjusted) 2 Year Treasury Note (Yield, %)



109.85

109.90

109.95

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200 DMA

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50 DMA

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Money Markets, ETFs and Trade of the Week

While a further acceleration in Eurozone realized

inflation and inflation pricing as discussed on page

one doesn’t seem like a good thing for bonds, we

note that some of the price action in bund futures is

starting to turn less negative.

As shown in the chart above, despite the very strong

downtrend since this summer’s yield lows (price

highs), measures of price momentum appear to be

starting to diverge. Prices are narrowing within their

trading range, retreating from their >2 standard de-

viations oversold reading a week ago. The 14-day

RSI is also starting to diverge in a similar pattern.

Behaviorally, this feels like it makes sense: taper and

hike pricing is reaching a fever pitch amidst soaring

energy prices, but risk assets are starting to react

and historically the end of Fed purchases has led to

a bond rally rather than decline.

Fid. Cash 0.01 0.000 Fed Funds 0.080 0.000

Van. Prime 0.01 0.010 O/N Libor 0.070 -0.002

Blackrock Cash 0.02 0.020 1M Libor 0.086 0.002

Fid. Munis 0.01 0.000 3M Libor 0.124 -0.008

Schwab Govt 0.01 0.000 4 Wk T Bill 0.096 0.063

Schwab Prime 0.03 0.000 3M T Bill 0.036 0.005

JPM Prime 0.01 0.000 6M T Bill 0.051 0.005

State St Gov't 0.03 0.000 1Y T Bill 0.089 0.020

GS MMkt 0.08 -0.001 Repo 0.045 0.005

Money Market Rates

Money Market Funds Key Short Term Rates

Yield 5 Day YTD

Ticker Name Price (%) TR (%) TR (%)

AGG Core US Bond Mkt 114.65 1.88 -0.02 -1.67

BIL 1-3 MoT Bill 91.45 n/a -0.01 -0.08

BIV Vang. Intrmed. 89.34 1.86 0.07 -2.04

BKLN Senior Loans 22.12 3.01 -0.23 1.63

BLV Vang. Long Term 102.14 2.80 -0.13 -4.51

BND Tot Bond Mkt 85.36 1.83 0.02 -1.79

BOND PIMCO Tot Ret 110.30 2.61 -0.06 -0.60

BSV Barc. Short Term 81.86 1.07 -0.02 -0.37

EDV Long Dur. Trsy 135.28 2.09 0.12 -9.80

EMB JPM EM Bonds 109.02 3.80 -0.66 -3.25

FLOT Floating Rate 50.79 0.36 -0.07 0.47

HYG iBoxx HY 86.88 4.00 -0.49 2.57

IEF 7-10 Yr Bonds 115.16 0.84 0.14 -3.43

IEI 3-7 Yr Trsy 130.10 0.68 0.07 -1.64

IGSB 1-3 Yr Corp. 54.55 1.52 0.01 0.11

JNK Barc. High Yield 108.51 4.29 -0.55 2.83

LQD iBoxx Invest. Grade 132.98 2.31 -0.11 -2.06

MBB MBS 108.12 0.21 0.10 -0.80

MINT Short Term Corp. 101.90 0.41 0.03 0.19

MUB Munis 115.93 1.80 -0.02 0.28

PFF Preferreds 38.26 4.66 -1.39 2.93

PGF Financial Preferreds 18.66 4.60 -1.49 0.61

PGX Preferred Port. 14.85 4.79 -1.30 0.92

SHM Short Term Munis 49.36 0.77 -0.02 -0.25

SHV Short Term Trsy 110.46 n/a 0.00 -0.07

SHY 1-3 Yr Trsy 86.11 0.15 -0.02 -0.15

SNLN iBoxx Sen Loan 16.05 3.67 -0.28 2.07

SPSB Barc. Short Term 31.22 0.92 -0.05 0.24

STPZ PIMCO 1-5 Yr TIPS 54.85 3.06 0.31 4.54

TBF Short 20+ Yr Trsy 16.64 n/a -0.18 5.45

TBX Short 7-10 Yr Trsy 24.44 n/a -0.16 2.22

TIP TIPS 127.96 4.05 0.56 3.76

TLH 10-20 Yr Trsy 146.93 1.62 0.08 -6.71

TLT 20+ Yr Trsy 144.32 1.52 0.11 -7.43

VCLT Long Term Corp 105.53 3.15 -0.27 -2.76

VCSH Vang. Short Term 82.29 1.57 -0.02 0.03

Key Fixed Income ETFs

German Bund Future: Roll-Adjusted (EUR)

167

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200-DMA

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80 OverboughtOversold14-Day RSI



Treasury Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Bunds Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Eurodollar Yield Curve: Current vs 3 Months Prior, w/ BPs Change

Inflation Curve: Current vs 3 Months Prior, w/ BPs Change

Bespoke Global Yield Curve: Current vs 3 Months Prior, w/ BPs Change

+2.79

+8.54

+13.86

+20.41

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+19.91

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1 Year 2 Year 3 Year 5 Year 7 Year 10 Year 30 Year

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3 Mo 6 Mo 9 Mo 12 Mo 15 Mo 18 Mo 21 Mo 24 Mo 27 Mo 30 Mo 33 Mo

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10/6/2021

7/7/2021

Benchmark Yield Curves Given the chaos in natural gas markets today

across the Atlantic, it’s somewhat surprising that

US interest rates have a bull-flattening bias, but

that appears to be the case. 10 year yields have

not made a new high versus their 9/28 peak, let

alone March levels, and 5 year yields are also be-

low their highs in late September.

SOFR futures for the December 2022 3 month

period remain near recent lows, and the trend of

steepening from December 2022 to December

2023 contracts (representing a more hikes in

2023) has continued. In general, the market isn’t

pricing anything dramatic, with slightly more than

1 hike next year and slightly more than 2 in 2023.

Eurozone credit markets have been widening

steadily with high yield OAS moving from around

220 bps in mid-September to more than 263 bps

today. Sovereign spreads haven’t participated,

with the average peripheral 10y yield trading

about 68.5 bps over bunds, the exact same place

they did two months ago.

Oil’s decline today is clearly taking some of the

pressure off of breakevens: the spread between

10y nominals and TIPS closed at five month highs

yesterday, up 5.8 bps to 2.46%, but is down today

as WTI falls 2% from the highest close since No-

vember of 2014 yesterday. A supply response is

clearly underway as production and rig counts

accelerate from 2020 lows.

With the Bank of Kora, Norgesbank, and RBNZ all

raising rates along with EM central banks like the

Banxico and CNB, global short-term nominal

yields have risen steadily over the last few

months, but longer-term yields are also making

new highs weighted by GDP of each local market.

We’re also starting to see some 2s10s steepening

as shown on the next page.



Bespoke Global Yield Curve: 2 Year Bespoke Global Yield Curve: 5 Year

Bespoke Global Yield Curve: 10 Year Bespoke Global Yield Curve: 30 Year

Bespoke Global Yield Curve: 2s10s Bespoke Global Yield Curve: 5s30s

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Curves, Spreads and Total Returns

High Yield Corporates

Municipal Bonds

Mortgage Backed Securities

Emerging Markets2 Year vs 5 Year

5 Year vs 10 Year

10 Year vs 30 Year

2 Year vs 10 Year

10 Year Italian BTP (vs German Bund, not Treasury)

Municipal Bonds

10 Year Swap

High Yield Corporates

3 Month vs 2 Year 10 Year German Bund Long Dated Treasuries

Treasury Curves (BPs) Spreads vs Treasury (BPs) Total Return Over Past Year (BPs)

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Page 2: These charts track the performance of the yield of Treasury bonds and their price in the futures

market over the past year. Also presented is the National Average 30 Year Fixed Rate Mortgage ac-

cording to bankrate.com’s index of mortgage lending.

Page 3: At upper left is a table summarizing the level and change of short term interest rates. Money

market fund rates represent the highest yields available to large money market fund investors for a

spectrum of funds. Next to the money market fund rates are benchmark short-term interest rates.

Each change represents the change in yield over the last five days. At lower left we show a grid of ma-

jor fixed income ETFs and include yield, five day change, and year to date total return for each ETF.

Page 5: Benchmark yield curves are “risk free” interest rates that other fixed income securities trade

relative to. All yield curves are expressed in basis points. Three month changes in the curves are

shown in basis points at each point on the curve. The Bespoke Global Yield Curve is a Purchasing Pow-

er Parity Gross Domestic Product-weighted average of nominal yields for the world’s fifteen largest

economies. It is graphed versus the yield curves for the United States and Germany, the two most-

followed global benchmarks.

Page 5: Time series charts for the yields of the Bespoke Global Yield curve, presented in basis points.

Page 6: The Treasury curve charts in column one show the difference in yield between the second se-

curity listed and the first. For instance, if 2 Year Treasuries currently yield 0.45% and 5 Year Treasuries

yield 1.45%, the “curve” between 2 Years and 5 Years is 1.00%. Typically, a flattening yield curve (a

chart of the curve moving downwards, or the difference between the two yields narrowing) is an indi-

cation of economic headwinds, but the absolute level of the curve between Treasuries can be as im-

portant as the change in that curve.

The spreads column shows yield differences between Treasuries and other important sectors of the

fixed income market. Each spread is expressed as the yield on the bond in question. For instance, if

Italian 10 Year government bonds or “BTPs” yield 3.50% and 10 Year Treasuries yield 3.00%, the spread

between them is 0.50%. This spread can be negative. All else being equal, a positive spread to Treas-

uries indicates increased credit risk. But when spreads are measured between two different currencies

(for instance, between German Bunds and Treasuries), a negative spread to Treasuries can be caused

by different inflation expectations, real growth rates or other differences between the currencies in

question.

Finally, the total return indices in the right hand column show the total return for Bank of America

Merrill Lynch bond market indices in each sector listed. Total return shows both coupon income and

price appreciation for each basket of bonds. These total returns are graphed as total return over the

prior year, starting from zero as of one year ago today.

The Fixed Income Report Explained

ez producer prices are a function of commodities consumer

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