Bilal’s Themes And Trade Idea Update: Short Rates

Markets are unstable with the latest being a sharp drop in CNY. I’ve been long the currency through my China rates trade. I’m exiting the trade and will look to re-enter short USD/CNH when the policy picture is clearer. On other trades, I added a short DM rates trade last week to capture hawkish pivots led by the Fed. Elsewhere, I keep my short equities and long oil trades. Here are the details:

1. Rising yields: short rates (US 5y, Ger 10y, Jpn 10y futures). We pick 5y for the US as it captures the Fed’s terminal rate, and 10y for Germany and Japan as that captures QT and changes in YCC, respectively.  
   1. Premise: Rhetoric from the Fed appears to be leaning towards 50bps hikes per FOMC meeting, but terminal rate pricing still appears too low. This could see bond yields continue to move higher. The risks are similar to varying degrees with ECB and BOJ.
2. Lower equity markets: short equities (S&P500, Eurostoxx). This trade has gained 0.5% since inception (it is half a notional unit).
   1. Premise: Fed likely to tighten even if growth slows, global economic slowdown, equity valuations pressured by higher bond yields.
3. Higher energy prices: long oil . This trade has gained 2% since our last update (scaled to one-third of a notional).
   1. Premise: there is a structural supply-demand imbalance in oil markets. Inventory levels are running low. The US’s SPR release appears to be priced now and risks of European sanctions on Russia energy are growing.

In terms of performance, our portfolio lost 0.7% over the past week. Since inception in 2020, it is up an annualised 13% with a Sharpe ratio of 1.9 (Chart 1, Table 2). Our largest risk position (VaR) is long oil, followed by equities (Chart 2). The P&L are paper returns, so are likely overstated compared to a real invested portfolio.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)