Bond trading has finally started to become profitable. The slowdown in US growth has forced down interest rates which have been great of those hold long bond exposures. Volatility has increased so there are starting to be some trading opportunities. This is the first time in years that we have had a sustained period of bond price gains.
One of the interesting facts about long-term interest rate has been how range-bound they have been since the last recession. As a result of this range-bound behavior, there has been a marked deterioration in trend trading in this asset class. Forecasting models have also deteriorated because there variation in rates has been much lower than some of the economic variables although both inflation and growth have been fairly stable over the last five years. The cumulative price return from holding long 10-year note futures has been zero for the last five years. The 5-year and 2-year note futures have performed only slightly better as the curve steepened. The 10-year futures has seen an increase in volatility but has not moved in a single. The tug between slower growth and inflation seems to be real on the long-end of the curve.
The chart highlights the fact that not much has been going on in fixed income for years and may explain the complacency that we have seen in these markets. Without variation in interest rates, investors reached out for higher yields. With limited volatility, there was a strong desire for buy and hold investing in yield products. We are now seeing the impact of that yield reaching.
“Nothing is so destabilizing as stability,” Hyman Minsky.
“By trying to take risk out of the markets, we made this downturn inevitable,” James Grant “Paying the Price for the Fed’s Success” editorial New York Times.
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