Bond yields have to rise, right? It’s a no-brainer… tax cuts, higher spending, global synchronous recovery, inflation – what can go wrong?
And that appears to be the group-think belief of some of the world’s bigger bond fund managers, who have staked more than $100 billion in one of the boldest bond bets of the post-crisis era: That a global economy firing on all cylinders would spur government yields in the West and boost emerging-market credits.
But notably, as Bloomberg reports, the wager comes in the form of bond funds that have a negative average duration, meaning they are heavily positioned for rising interest rates.
But the trades are struggling. A perfect storm — including muted core inflation increases and relentless haven flows — has kept a lid on longer-dated developed-market yields. Trade tensions and a stronger dollar have killed the emerging-market rally, bucking consensus on Wall Street.
“Trade tensions have hurt our European growth thesis,” argued McIntyre, who oversees $58 billion of fixed-income assets at Brandywine Global Investment Management. “We need clarity on how trade is going to unfold for our short European duration positions to outperform again.”
Franklin Templeton’s bond chief, Michael Hasenstab, has been waiting since at least 2016 for his wager — that U.S. rates would return to a pre-crisis normal of sorts thanks to an economic upswing and diminishing monetary stimulus — to come good.
Goldman Sachs AM’s $4 billion Strategic Income Fund has underperformed all peers in the past month, according to Bloomberg data, despite marketing itself as a portfolio that can “potentially gain in any rate environment.”
And then of course there’s Janus-Henderson’s Bill Gross, who has seen harrowing redemptions in the first half of the year, amounting to $580 million as a result of the worst performance of his peer group in that period, as the unconstrained fund slumped 6.3% this year through June.
And in fact bond bears have never in history had a larger short position than now…
There’s just a few things.
The short-end – eurodollar curve has now inverted, suggesting the terminal rate for Fed hikes is close
The swap curve has inverted at the long-end…
And The US Treasury curve is collapsing…
And finally Dr.Copper is suggesting a growth scare is coming…
Still, everyone should just ignore the collapse of the yield curve according to Bank of Canada’s Poloz, who stated this morning that he “doesn’t interpret the flattening of the yield curve as a warning sign,” adding that it’s “due to the appetite for the long-end.”
Well Mr. Poloz – why do you think there is an appetite for longer-dated bonds is so high? Anxiety over global growth?
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