All posts in category: US Treasuries (11)

The Next Ten Percent

Friday, September 15th, 2023

What happens if US equities have a correction

We think that US equities may be vulnerable to a correction over the next two to three months. Our models suggest that the Technology sector may be about to underperform and that this could put pressure on other related sectors which have also performed strongly this year. We identify three separate trades which may be able to mitigate some of the impact: long-dated US Treasuries, large cap Japanese equities and Energy equities in the US and Europe. The rationale behind each idea is discussed in detail in the note, but the key point is that they are largely unrelated and therefore offer an interesting diversification strategy as well.

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Three Big Risks

Friday, August 4th, 2023

Dollar, oil and Treasury yields

Our models suggest that the near-term outlook for crude oil and 10-year Treasury yields is higher, while the trade weighted dollar is lower. This is not the consensus view. More importantly, we think that the medium-term risk-case for Treasury yields and the US dollar is much worse than the consensus is prepared to consider. It is hard to imagine a world of high and rising yields, if you have spent your career in an era of falling yields. The same is true of the dollar but in reverse. Investors ought to make the effort to do so, lest they are unpleasantly surprised.

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False Sense of Security

Monday, July 10th, 2023

7-10 year Treasuries offer no hedge against equity declines

We are mystified by the ongoing strength of the long end of the US yield curve. We fully acknowledge our bias towards a higher-for-longer view of inflation. Even so, we don’t understand why investors are willing to put up with lower yields and higher volatility than they could get by investing in shorter-dated Treasuries. Over the last 18 months, 7-10 year US Treasuries have delivered absolutely no protection against a decline in US equities. In fact, they have a tendency to decline at the same time and this downside beta has been getting worse. The same relationship affects all Treasury maturities from 1-3, all the way out to 10-20, but the 7-10 year index has the worst beta.

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Some Safety Plays May Not Work

Friday, April 7th, 2023

Positive correlation between equities and bonds still a threat

The top-down consensus is rightly gloomy about the outlook for earnings estimates and equity benchmarks in the US. The problem is that the market shares this analysis and still refuses to go down. We need an additional catalyst to shake us out of the current trading range. A mild US recession is not the main risk to balanced portfolios, provided bonds rise while equities fall. What we worry about is a bear market in everything, if the current regime of positive correlation between equities and bonds continues. There are ways to mitigate this, by lowering the beta in your equity portfolio, increasing exposure to Europe (and anywhere else that may benefit from a weak dollar) and increased exposure to cash and money market funds.

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Bull Market in Cash

Friday, March 3rd, 2023

Bonds are not the best hedge for equities

The 40-year bull market in bonds is over and investors will have to adapt. We argued last time that cash should have a much more important role as the risk-free asset against which all investment propositions are evaluated. This week, we look at how cash has interacted with equities and government bonds over the last two years. We find that a three-asset portfolio, using our standard process, has significantly outperformed our standard equity/bond model, in both the US and Europe. Returns are higher in both absolute and relative terms and drawdowns are much lower. We think investors should consider raising their benchmark cash weighting to somewhere between 15-20%, with a pro-rata reduction in both equities and bonds. Some of this new cash weighting could be held in foreign currency.

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No Longer the Cornerstone

Friday, February 17th, 2023

Cash is the new risk-free asset

Using the word “risk-free” to describe an asset which has fallen by some 20% during the course of the last two years, would offend most ordinary users of the English language. But finance professionals are still happy to do this when talking about long-dated government bonds. 10-year US Treasuries have failed to hedge the decline in US equities and the same is true in the Eurozone. Worse still, tactical allocation models based on this relationship have under-performed their benchmarks, removing the possibility of generating any alpha from market timing. All these problems go away as soon as we use cash instead of government bonds. It has higher absolute returns than bonds in the US and the Eurozone and the new models outperform their benchmarks with lower drawdowns and better risk-adjusted returns. It’s time for a rethink.

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Eight Non-Consensus Views

Monday, December 19th, 2022

A bearish consensus can still be complacent

We agree with the idea that US equities are going to suffer in the New Year, but disagree with many of the assumptions surrounding this view. We think US Treasuries are behaving like a risk-asset and cite their current elevated volatility as evidence. We highlight the positive correlation between equities and bonds, which means that there we may well repeat the bear market of everything we saw in H1 2022. On this basis, the dollar strengthens temporarily and the trough in equities is delayed till Q3. When the recovery comes, sectoral and geographic leadership in equities in likely to change and China will be a much bigger part of the story than Western investors currently imagine. The outlook for oil is anyone’s guess, but it will influence inflation expectations and generate bursts of volatility in all markets, contrary to its current benign behaviour.

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In Praise of Cash

Wednesday, November 30th, 2016

What happens if the Fed surprises on the upside

US cash deposits are a neglected asset class. Our models suggest that US Treasuries, Gold and Investment Grade bonds have a low or no-better-than-evens chance of beating cash on a risk-adjusted basis. If you don’t have to own them, you should be reducing your exposure. Our numbers do not include the risk the Fed decides to surprise on the upside in 2017.

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Diversification in a Positive World

Wednesday, September 21st, 2016

Greater China is negatively correlated

This is the second part of our exercise looking at ways in which investors can diversify away from the threat of falling US Treasuries. This week we focus on global equities and argue that the best protection is offered by Greater China (including Taiwan and Hong Kong). This region is also on the positive watch-list in our All-World Country Equity Report.

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How to Manage Falling Treasuries

Wednesday, September 14th, 2016

Buy Credits where volatility is still falling

We think that the best way dealing with falling Treasuries is to stay in fixed income and to seek out situations in the credit markets, which are priced for high levels of risk, and where volatility is still falling. The problem with reducing duration or buying inflation-linked bonds is that the Fed and other central banks can force you to unwind it if they want to.

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