You can make money on bonds (just go short)

Q: I know managed futures funds have had a great year, up around 38%. Is this mainly due to having the right call on the bond, or is there some other explanation behind it? What’s the secret to having such a good year?

A. So I wish I could say it’s the same thing. Have been many times. One of the best trades of the year is shorting bonds. Another great trade is long energy, especially in the first half of the year. We’ve also seen a huge opportunity in the currency market lately, because you’ve seen the dollar’s strength relative to other currencies really skyrocketing. So that kind of thing that shows you, it’s not really a one-trick pony. It is not an asset class. It’s really about adapting to the current macro environment and using the information we see in the market to adjust positions, which seems complicated in many historical contexts, but actually makes sense in this environment, especially From a macro perspective.

Q: I think if you were a discretionary macro fund manager, under what circumstances would you be long USD and oil at the same time? I think their heads will explode. But I guess that’s the whole concept of adapting to the market.

A. Yes, that’s right. I think you brought up the bond, let’s talk about that because it’s interesting. In fact, we recently wrote a paper on shorting bonds because it’s beyond the reach of most investors I talk to. If I ask a group of people, how many of you think interest rates will go up? They will all raise their hands. But if you ask how many of them are willing to short bonds or have short bonds? Nobody will. This highlights the fact that most of us are used to the idea that we only do long-term bonds and that bonds will always help us. They’re kind of like our tried and true safe deals.

So for the 60/40 and the typical investor, this year let them stand there, “I don’t want to do that.” People like us who really focus on short-term strategic tactical opportunities, even from a historical perspective, it’s a Kind of a great deal. It’s a strategy that hasn’t worked since 1994. So, you know, think about it. That’s a long time.

Q: I’m curious what this quick response trend will look like, because apparently we had a really bad start to the year in bonds and yields went up. Then there was a hiatus, and yields fell back a lot over the summer. Are you able to ride both ends of this trend, or more importantly, what are the long-term trends?

A: Therefore, trending is a very adaptable strategy that is relatively quick in relative positioning compared to long-term investors. But what we’ve seen this year is exactly what you said, with different macro themes emerging over the course of the year. So, in the first quarter, we saw inflation and rising interest rates as a theme, which was reflected in long commodities and short fixed income products. This particular type of trade shifted to short-term bonds and long dollar trades later in the year as commodities began to dissipate.

So you see this positioning and view on commodities shifting more towards recession versus non-recession environments. Then in June, we saw a turn in the market, as you suggested, increased volatility, increased cross-asset correlations, and general sentiment that these themes were in a sense consolidating into the market, and you started to see There’s been a huge reduction in some of the targeting that you saw earlier this year.

And then we started seeing this month and last month back to what we saw earlier this year. I think some of that is because central bankers are holding steady. It’s basically saying, you know, this move to “I think this is over” is kind of pre-emptive. I think it’s time to wait a bit and see how we actually deal with this inflation and how we deal with things going forward.

Q: So do you think short-term bond trading is on track this year? In your opinion, is there more to be gained from it?

A: Yes, I would. I think there’s more to go in short-term bond trading, especially with the comments we’ve seen recently that the Fed has really held steady in recent times. The reason is that a lot of the core issues have gotten to the point where we haven’t fully resolved them yet. And I think we’re going to have to see inflation actually dissipate, and we’re going to have to see that we’re in a situation where things are more stable before we can really end this.

So in that sense, I think we’re likely to be in an environment of rising interest rates for a while. What we’re going to see, what we’re seeing through a longer-term study, is that if we’re in a really secular rising interest rate environment, we’re going to be more short on fixed income than we’ve been in the past 40 years. From an investor’s perspective, that’s something to consider, you know, if we have a long-term, rising interest rate bond market, how do you think about your bond exposure?


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