MH Model Portfolio: Fading the BoE Terminal Rate With US Strength

We made three changes to our trades since last week.

We re-add our short 1Yx1Y US OIS vs 1Yx1Y SONIA trade targeting a return to a spread of 100 bps. We have long been waiting for the opportunity to fade BoE terminal rate, and the weaker UK labour market data provided this opportunity. Since then, we have also had a weaker-than-expected inflation print, which has helped push the trade in our favour.

We also added long 10Y Bonos vs 10Y OATs as we see value in being long the eurozone periphery vs semi-core. This month’s Spanish election is expected to replace the left-wing coalition, which we expect the market will take as positive for the fiscal outlook. Meanwhile, the trade rolls and carries positively (+1.5bp carry, +2.9bp roll over 3 months).

Finally, we add a basket of BRL, MXN and COP versus USD as our favoured expression of being long LATAM carry. We see value in expressing this via a basket rather than any individual currency and intend to run the trade through the summer while the US CPI is expected to be dormant.

Our portfolio has returned +7.3% YTD, up slightly from last week, and +49.8% since inception (+12.2% annualised) with a 1.2 Sharpe ratio. This continues to place it above the average discretionary macro hedge fund (Bloomberg: BHDMAC Index; Chart 1). Our largest risk positions (VaR) are in FX, followed by rates, and then equities. Note: Our P&L are paper returns so will be overstated relative to a real invested portfolio.

Current Trades

DM

1. Long 10Y Bonos vs 10Y OAT (target 40bp) – read here. 
2. Short 1Yx1Y US OIS vs 1Yx1Y SONIA (target 100bp) – read here.
3. Short UK 10Y Inflation Swap (target 3.65%; stop 4.0%) – read here.
4. Long EUR/GBP (target: 0.89; stop loss: 0.845) – read here.
5. Short 10Y Treasury vs. 10Y Bunds – read here.
6. Long 1yx1y receiver swaption with a 1yx1y pay fixed swap positions – read here.
7. Pay 6M forward 1Y EUR OIS (target: 4%) – read here.

EM

1. Long LATAM FX carry – read here.
2. Long SHCOMP (target: 3,600) – read here.
3. EM to rally – read here.
   • Short USD/IDR 3M NDF (target: 14,000).
   • Short EUR/CZK (target: 23.25).
4. Receive 2Y INR OIS (target: 6.0%) – read here.
5. Short SGD/THB into Thai elections (target: 24.75) – read here.

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.

Photo Credit: depositphotos.com

(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.)