While equities continue to take the risk of escalating trade wars in stride, ignoring the threat of an additional $200BN in tariffs on Chinese exports and pushing the S&P back above 2800, some investors are taking a far more cautious approach: instead of piling into tech names – the most popular trade of 2018 bar none – Australian investment manager AMP Capital Investors, which manages $139BN, is instead buying ultra-long bonds as a hedge for a worst case scenario, according to Ilan Dekell, the head of macro for global fixed income at the asset manager.
“Six weeks ago, we started increasing our duration in the 30-year part of the curve,” Dekell told Bloomberg in an interview in Sydney. “It gives us a bit of protection. I can’t forecast the trade war.”
Doing the opposite of Horseman Capital, AMP Capital is also betting on continued dollar strength by shorting a basket of emerging-market currencies which have been pounded in recent months amid tightening global liquidity.
Looking ahead, Dekell said that “the best is probably behind us,” referencing the environment of synchronized and rising global growth and benign inflation seen earlier this year, which have since seen the US emerge as the leading dynamo of global growth largely on the back of Trump’s fiscal stimulus. And then there is the great unknown of what Trump may do or tweet at any moment: “The trade war adds to our concerns – our book overall is very conservative.”
While betting on lower long-term yields, the fund is also shorting two-year government notes, betting the ongoing yield curve steepening will continue as it sees the Federal Reserve raising interest rates two more times this year and thrice in 2019.
“We held our shorts in the two-year part of the curve” because of the rate hikes, said Dekell. “We’ve become more concerned and conservative about tightening conditions and we think the policy bias is higher.”
As the latest CFTC data reveals, the AMP position is against the market grain, with specs putting on record bets that the curve will steepen in the near future, as 2Y shorts have shrunk even as 10Y net spec shorts remain at record levels.
Dekell also has a negative outlook on emerging markets, seeing further weakness in EM assets, particularly in countries with current-account deficits such as Indonesia and India. Looking at the Australian dollar, Dekell said the currency is currently trading at “fair value” after predicting earlier in the year that the AUD would fall to 73 U.S. cents before the end of the year. “If you go down the route of trade wars and people getting concerned about China growth, then that would put downward pressure on the Aussie.”
AMP Capital is not alone to seek refuge from the coming storm in 30Y bonds: as Bloomberg notes, the same strategy is being used by Goldman Sachs Asset Management and QIC, while PIMCO previously said that it would seek a Treasury safe haven “if things get worse.”
The 30Y Tsy was yielding 2.93%, down from 3.26% mid-May, when it hit the highest level since September 2014. Recently, Morgan Stanley went so far as to call the peak in the 10-year yields amid trade concerns with the number of stories referencing “trade war” closely following the price on the 30Y Tsy.
Meanwhile the broader market remains overwhelmingly short the 30Y, with non-commercial net spec shorts targeting the Ultra bond in record amounts, providing continued ammo for a material short squeeze if economic growth in the US or globally were to take a leg lower, an outcome that is quite possible should the global trade wars accelerate .
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