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Behind The Scenes Of The Epic Rates Rally
As you might've noticed, the bond rally -- already one of the more impressive in recent memory in terms of scope and rapidity -- escalated on Thursday morning in the US.
Although off the lows into the afternoon, 10-year yields were below 3.89% at one point.
Not that anyone needs a reminder, but the intraday cycle high was 5.02%, less than two months ago.
This counts as a pretty epic move. Had you suggested, in late-October, that US 10s would sport a three-handle by mid-December, you would'v
Look at all those “100”s in eurozone bonds.
Of course, those are longs.
What I’m wondering is why CTAs are so much longer Eurozone bonds (100% long) than Treasuries (if that’s what the table shows). More negative on Eurozone economy?
Well, remember: They don’t “think.” They’re trend followers. They de- / re-leverage based on momentum signals.
JL – See my comment below. It seems like you remain an “Old Believer.”
(Old Believers were Eastern Orthodox Christians who maintained the liturgical and ritual practices of the Russian Orthodox Church as they were before the reforms of Patriarch Nikon of Moscow between 1652 and 1666. Resisting the accommodation of Russian piety to the contemporary forms of Greek Orthodox worship, these Christians were anathematized, together with their ritual, in a Synod of 1666–67, producing a division in Eastern Europe between the Old Believers and those who followed the state church in its condemnation of the Old Rite.)
But if you want to try to read things into short-term rotations, yesterday beleaguered European capital goods stocks screamed higher. (For example Kion, ams-OSRAM and Eramet rose more than 10% while consumer staples sold off.)
Another example of the divergences between stocks and bonds.
derek, you are right, but what’s the alternative? It is not practical for me (or many) to chase short-term moves.
Agreed JL. For the moment a trader’s job is to try and anticipate
the rotation du jour and front run it. Yeah, all short term stuff.
It’s not so obvious for longer-term investors like us, is it?
Longer term, I think past stock-picking playbooks still work. Not all the time, but they never did, so style rotation is still pertinent, to the extent one is capable of it.
My usual is: find undervalued and out-of-favor sectors and industries with positive catalysts in the next 6-12 months, pick stocks in those industries with appropriate cap and quality (sometimes smaller or lower, sometimes larger or higher), scale up positions as momentum inflects positive, and try to be a farmer, with a third of your field ready to harvest, a third growing, and a third recently planted. Harvest when stocks cease responding to positive datapoints, hopefully at unreasonably high valuations. When there is little to buy, sit on cash.
This worked not at all in 2023, but oh well, there’s always 2024.
But there is hope: Spec managers would be remiss if they were not already building models that try to flag the next emerging theme rotation. For years people have looked at tallies of symbol searches on Bloomberg & Yahoo Finance to try and find emerging trends.
Perhaps AI will speed this up and make it easier, which would probably reduce or even eliminate the efficacy of the models.
Predatory models trying to prey on other models! The Battle of the Titans II.
Thanks for posting these articles.
So much for the notion that bond prices are driven by “the market” weighing inflationary expectations as in the good old days of the “bond vigilantes.” Old timers just do not want to acknowledge the new market realities.
The same holds for stocks, where so many cling to the quaint notion that careful, sober investment committees act after diligently weighing the outlook for earnings growth.
Wake up! Even before the impact of AI has kicked in, we’ve been replaced by computer models and instant push-button short-term rotations.
It’s not just blue collar workers in heavy industries whose job security is or should be called into question.
How different is investing nowadays from betting on not just the outcome of football games but total points, number of first downs, the coin toss winner and such?
It’s hard for many of us to accept that we are simple gamblers, eh?
Simple gamblers? Yeah…it’s taken me 35 years to gradually, inexorably come to accept that I do indeed resemble that remark! As our fearless leader here periodically reflects, most of us in the long run would be better off with a passive, index-based approach while relegating all the rotations, prognostications, algorithms and now AI accelerations of all this stuff to faint background noise.
But…like the occasional session at the blackjack table – I just try to limit my indulgence to relative harmlessness; but can’t go cold turkey…it’s just too much fun!
Coming off three very lucky gambles in succession (Meta in October 2022, which I mentioned in these pages at the time, Amazon in January, which I never mentioned, and bonds in October, which I mentioned on too many occasions to count), I bought some Pfizer today. Not investment advice.
#MeToo, though a couple of days ago. Not too many large caps below their pandemic lows, or at least not among the ones I follow. And my personal backlog of vaccines and boosters is currently at a mult-decade high dating back to when mumps and measles were a threat.