There is the old view that trend-followers do not make high returns trading rising rate environments. Generally, that view has been true for several reasons.
One, the trend in rates has been down since the early 1980's, consistent with the decline inflation and real rates. Two, rising rate periods have not lasted long and have generally been linked with higher volatility. The opportunity for short Treasury trades have been fewer. Three, central banks have shown a bias toward capping rate increases, the Greenspan put. Four, central banks have been involved with QE since 2008 which pushed rates lower. Money was made with shorting bond futures, but it was not easy profits and the rising rate trends were not as extended as the rate declines even with a zero bound. Four, during the period of rising rate in the 1970's, bond futures were not actively used. We don't have good information on how the trend-followers would have done. There can be assessments based on rate data, but not futures.
The world has changed over the last year with the Fed raising rates with a consistent change in policy. Trend-following is conditional on the global macro environment. We are now in a Fed hawkish environment with repeated increases in rates. The result has been an extended trend higher in rates and trend-followers making money from the short side. This Fed change does not mean one-sided trading but there is a tilt to rate increases with short-term reversal; the opposite of pre-pandemic decades where the tilt was to lower rates with intermittent rate increases.
No comments:
Post a Comment