10-year yields in the US were up a rather remarkable 13bps on Friday, as firm retail sales and a better-than-expected preliminary read on University of Michigan sentiment added fuel to the bond selloff.
As noted, this week witnessed the biggest rise in 10-year yields stateside since the election.
Bonds’ sharp turnaround from August (a month during which US government debt posted its best return since 2008) is now widely cited as the proximate cause for Monday’s historic “momentum massacre”, which Nomura’s Charlie McElligott described as “one of the more stunning trades in modern market history”.
Although we’ve spilled gallons upon gallons of digital ink documenting this story over the past several sessions, it just refuses to go away thanks to the worsening selloff in bond land.
This is a global affair. Bunds bear steepened on Friday, as 10-year yields in Germany jumped 7bps, while 10-year gilts were cheaper by as much as 9bps. USTs are nearly oversold.
This continues to pose a risk of unwinds, rotations and general “indigestion” under the hood for US equities.
“Bond risk in equity markets should not be overlooked”, SocGen’s Andrew Lapthorne wrote Thursday, adding that the bank’s “primary argument for Value was not dependent on accelerating GDP growth or an economic regime change, but largely about the need to diversify interest rate risk”.
Well, rates are rising in a hurry, and that’s playing havoc with various and sundry bond proxies and other crowded, consensual longs. Although things have calmed down on that score since Monday’s hair-on-fire insanity, a simple relative performance chart of the Momentum ETF versus the Value ETF plotted with yields paints a pretty dramatic picture for the week as a whole.
“There is too much bond price momentum priced into asset prices and to hedge this risk you need to buy cyclical upside”, Lapthorne went on to write yesterday, before delivering the following straightforward assessment:
That might be bank stocks, autos, the Nikkei 225 or Value, which by definition is a portfolio of the world’s problems. Value stocks are still attractively valued, but they will most likely require positive economic news flow to extend their rally. Despite some relief from macro fears and trade talks, the economic environment has not changed. Rates and credit spread moves following the upcoming central bank meetings will be key to watch. Value [gave] back some of its gains in Europe following the ECB meeting [Thursday]. Irrespective, investors need to diversify their bond and bond proxy risk. Too many investors are poorly exposed to positive news. Value stocks, a portfolio of doom-laden stories as we have seen in recent days, provide such a hedge.
There you go. The case for a portfolio of “doom-laden stories” is simply that investors don’t have enough exposure to good news (those “doom-laden” stories can rally if the news flow improves).
As rapid as the Momentum unwind has been, Goldman reminds you that it’s really just a retracing of August, just as the rise in yields is “August in reverse” (as BofA put it earlier this week).
“Momentum soared by 12% in the first half of August and 17% through August 27, a surge that in the last 40 years has only been matched in the late 1990s and late 2000s”, Goldman notes.
(Goldman)
And don’t say the bank didn’t warn you, because they did. And we highlighted that warning at the time in “Hedge Funds ‘Particularly Vulnerable’ To Market Unwind On ‘Crowding Risk’”.
“A rise in investor crowding set the stage for the violent market rotations of the last two weeks”, the bank said Wednesday, recapping the main points from the latest edition of their hedge fund trend monitor.
(Goldman)
“Trends of rising portfolio concentration, falling position turnover, and increased crowding have accelerated in recent quarters and increased the risk of a positioning-driven unwind”, the bank recounts.
That crowding, Goldman says, “helped drive the outperformance of the most popular stocks, which in turn further increased both leverage and the weight of these positions in investor portfolios”.
