Thanks to policy-induced crowding-in of Treasuries, the front-end of the curve is now doing exactly what the Fed feared the most. A nightmare scenario of cutting rates… and nobody caring. Positive historical skew has made them a popular diversifying asset for the momentum crowd – and that’s exactly why we should be concerned.
You want some duration? Try this on…
The CTA community has likely sold in excess of $100bn 10-yr Treasury equivalents in the last 5 days – and that number is only going to grow.
This isn’t intended as a rant against the practice of diversification – nothing could be further from the truth. But, like all popular investment tools, there’s a mythology that’s been created around modern portfolio theory to suggest a panacea to cure all ills. It’s peddled as a fairy tale that ends with investor & portfolio happily ever after – together on a horse, riding off into the sunset. My argument is that the benefits of diversification depend on having appropriately calibrated priors. And when those priors are dramatically altered, it’s time to reassess – not double-down.
The Fed now spends over 1/3 of its time talking about financial markets in the minutes. That’s more than trade, monetary policy & employment combined. This unhealthy obsession is a distraction – and it’s guiding the market in a dangerous direction.
There’s been a lot of discussion recently about $ strength preventing risk assets from making new highs. I don’t dispute the fact – it’s pretty obvious that we’re losing badly in the battle for competitive devaluation that global central banks have embarked upon. But it’s even worse than the headlines might suggest: where the real damage is being done is in FX forward markets. In some cases, 12mth $ funding has more than doubled in the last two months alone. #China #Europe #Canada, etc.