RBS rates strategist Andrew Roberts is only talking in quotes — and not the stock kind either.
His latest European Rates Weekly is chock-full of bond market soundbites, all of which would be music to a bond bull’s ears, or make a bond bubblist‘s ear drums burst in horror.
In fact, the note even begins with a quote — but we’ve highlighted some others for you too:
‘It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market… Men who can both be right and sit tight are uncommon.’
(‘Reminiscences of a Stock Operator’, Edwin Lefevre, 1923)
- * ‘Neutral is the new short’, as we say in client meetings. Leg one of the rally, shorts exiting, is complete. Leg two of the rally is the market getting long.
- * The no.1 conclusion of this is that reaction to any weak data/events/speeches will/would be more violent, as positions have the ability to turn quickly & the consensus which is still focused the other way (ie, earnings fine, growth fine, selfsustaining recoveries) changes view.
- * So do not be surprised by severe downward yield moves in coming weeks.
- * The equity spurt from the EMU stress tests is now complete in our (FI strategy) eyes. Global equity weakness should be a major force for asset allocation & lower yields, and when this does kick-start, it should be a strong positive at 30-years.
- * We get accused of making clients reach for the razor blades (as a client said to us today). Far from it. A portfolio of gold, yen (or best in swiss francs our RBS FX strategist Paul Robson suggests) and 10-yr nominal govts in countries not in the ‘possible default’ category should continue to be solid routes to profit.
- * 10s continues to be our sweetspot for long positions. As we said similarly in mid-2008, this is a duration world, not an RV world. Be long. Next trade is to see an extension of lower for longer, and the soft bull trade of 2s5s flatteners moved longer. 5s10s trades too steep relative to 2s5s because the weight of this lower for longer theme has led to high positioning in 5s (visible in CTA data & anecdotally in Europe). We see this shifting along the curve (and eventually into 30yrs). See our trades around this (eg, 5y5y), especially Andy Chaytor’s UK piece where this looks very attractive.
The quote at the top is from one of the two main sources I have learnt most everything I know (however small), on how to invest and think about markets. This is perhaps the most important summation of how I see fixed-income. Why?
There has been an FI rally. In three weeks, while consensus has been looking for pullbacks, 10-year bunds have rallied -43bp, Gilts -37bp, Sweden -41bp, Australia – 27bp, Canada -21bp, JGBs -12bp. Yet we read much of a reluctance to buy now – we have heard ‘buy on dips’ from a prolific number of sources. Understandable, but we disagree. We work on a business cycle framework; hence our ramping up of our max long call three months ago when we suggested in this column a coming collapse/turn in housing unlocking the first big leg of the next global yield rally. Global growth is slowing while the bond bears are turning – we cannot afford NOT to be in this market. The fascinating chart opposite says it all – this rally has been consistently opposed, consensus continues to see each rally as a reason for yields to rise.
We are oozing with bond bullishness, and have been throughout. Nothing has changed. The cycle is playing out exactly as we expected and has been very straightforward so far thanks to the utterly crushing forces of deleveraging & balance sheet adjustment which are bedrocks of our strategy themes. If (a big if) it continues to do so, we have high confidence that 10-yr bunds will be the first non-Japan major to have a 1.xx% handle in a very few weeks.
Yields on Germany’s 10-year bund are currently hovering around 2.44 per cent, having hit a record low of 2.24 per cent last week. Perhaps more importantly — in terms of RBS’s duration argument — the spread of the 10-year over the two-year bund narrowed to 165.4 basis points, the smallest amount since March 2009.
Bond bulls, duration devotees, RBS’ rates team — all clearly having a moment.
(Full RBS note over in the usual place.)
Related links:
How low can they go? - FT Alphaville
Yield hunt drives longest-maturity debt demand – Bloomberg
That ‘Monster QE, markets-on-a-cliff-edge,’ RBS note – FT Alphaville