Nick Givanovic: Treasury Bonds Are “Historically Unattractive” To Leveraged Investors

Episode Summary

Executive Summary: Nick Jovanovich argues that US equities remain preferable to Treasuries because growth is resilient, inflation is still sticky, and Treasury supply is heavy with no credible deficit fix. He sees bonds as unattractive on carry and term premium grounds, expects curve steepening, and thinks the short end is more likely to rally first if growth weakens, with a faster bull steepener the likelier outcome.

Main Topics: Equities vs. bonds: Jovanovich says he prefers stocks over Treasuries because growth is still solid, equity earnings are holding up, and bond returns look poor relative to risk. Treasury supply and deficit pressure: He emphasizes that the US is issuing a large amount of debt, with no political will to reduce deficits, and that future supply shifts from bills to coupons will likely pressure long-duration bonds. Yield curve steepening trade: He expects the yield curve to steepen over time, mainly because the 2-year has a cap tied to Fed policy while the long end faces rising term premium and supply concerns. Fed policy and recession odds: He argues Powell has signaled that hikes are unlikely and that cuts depend on clear weakening in labor/inflation data, which has not yet appeared. Market microstructure and auction dynamics: He explains how Treasury auctions, dealer balance sheets, non-competitive bids, and when-issued trading affect demand and price sensitivity in the bond market. Short-end reinvestment risk: He highlights that money-market and bill investors could rapidly rotate into 2- to 3-year paper when cuts begin, causing a fast bull steepener. GameStop as a policy/liquidity signal: He views the GameStop surge as evidence that financial conditions are not tight enough and that speculative equity bubbles can still form.

Key Arguments: US growth remains resilient, so there is no strong data case yet for lower yields or a bond rally. Treasury supply is large and likely to get larger, while the political system has no credible deficit-reduction plan. The mix of bills versus coupons cannot stay this favorable forever; a rebalancing toward coupons should pressure term premium. Banks and leveraged players are poor structural buyers of duration when the curve is flat/inverted because carry is unattractive. The 2-year yield is effectively capped by expectations for Fed cuts, while long bonds have no comparable ceiling. If the economy weakens, the short end could rally very quickly as cash and bill investors reinvest into longer maturities. Bull steepening is more likely and faster than bear steepening because the Fed has already signaled a high bar to further hikes. Equities look better than nominal bonds because corporate balance sheets and earnings trends are stronger than the sovereign bond backdrop. TIPS are preferred over nominal Treasuries because sticky inflation makes real yields more attractive than nominal duration. GameStop-style speculation suggests liquidity/monetary conditions are still loose enough that vigilance on risk assets is warranted.

Data Points: 2-year Treasury yield: 4.84% - Referenced as the current level around which Jovanovich is neutral on the short end. 2-year yield ceiling: about 5.10% - He said he would be a levered buyer of the 2-year around this level. 10-year Treasury yield: about 4.48% to 4.65% range - Discussed as the long end level versus overnight funding costs. Overnight Fed funds rate: about 5.3% - Used to illustrate negative carry when funding duration. 2s10s curve spread: 16 bps to 40 bps range YTD; about 36 bps currently - He said the curve has stayed in a range since the start of the year. Treasury issuance: over $500 billion per quarter net new supply - He argued that new issuance is large and ongoing. Total issuance vs maturities: over $1 trillion issued per quarter; about $500 billion net per quarter - He described the Treasury’s gross and net funding needs. Unemployment rate: 3.9% - Current labor market strength cited as a reason the economy has not weakened enough for the Fed to cut. Jobs added per month: around 200,000+ - Approximate pace of payroll growth used to support the resilient-growth view. GameStop premarket move: from about $30 to $70, then around $50; up 65% from prior close - Used as an example of speculative excess. TIPS real yield: about 2% - He said this plus sticky inflation makes TIPS attractive versus nominal bonds. Inflation/CPI assumption: about 3% sticky inflation - Used in his rough return logic for TIPS. MOVE index: around 100 - He described bond-volatility measures as low relative to recent history. 2-year inversion history: roughly 1% inversion peak, now 36 bps inversion - He used this to frame possible future curve moves.

Pivotal Quotes: "I’m a much better buyer of equities than I am of bonds until I see some data that says that I should be otherwise." — Nick Jovanovich: His core asset-allocation view at the start of the interview. "Why would you invest in 10-year treasuries? You know, it’s just one of the most unattractive periods in history that I can remember." — Nick Jovanovich: His strongest bearish statement on long-duration Treasuries. "At some stage, it just has to happen." — Nick Jovanovich: His view that curve steepening and a regime shift in rates are inevitable if current data and supply trends persist.

Implications: Listeners should expect continued pressure on long-duration Treasuries unless growth weakens materially. Jovanovich favors equities, TIPS, and the short end, with a likely curve steepening driven by Fed cuts or rising term premium.