WHAT HAPPENED TO MY REFLATION TRADE? A thread
The past two months have been brutal for my PA.
Some news was objectively bad for inflation trades: delta variant, Fed, China slowdown ... but not enough to justify this massacre.
Let's dig deeper 👇👇 (1/6)
POSTIONING
Always a weak argument (there is a buyer for every seller), but reflation had become the consensus by June and spec traders were abnormally short bonds.
This anomaly has been mostly corrected (2/6)
TARGET-DATE FUND REBALANCING
Funny how the 10-year yield peaked on March 31, the last day of Q1! 🤔🤔
Stocks outperformed bonds by 45% between June 2020 and June 2021. Target-date funds had to buy a lot of bonds to get back to their target allocations
(3/6)
EUR & JPY FLOW INTO TREASURIES:
On March 31, .S. 10Y UST paid 2% more than German bunds and 1.6% more than JGBs.
Hedging costs collapsed at the same time. A hedged position in 10 Y U.S. Treasuries yielded 1.3% in Japan and 93 bp in Germany (4/6)
PSYCHOLOGY
Reflation would destroy the bedrock of the past 40 years: the negative relation between stocks and bonds, the Fed put, rising multiples, and 10% returns for 60/40 portfolios. Investors prefer to believe central bankers, rather than “their own lying eyes”.
(5/6)
THIS TOO SHALL PASS
Citi inflation surprise index still soaring.
Reflation sectors are still crazy cheap, especially as their earnings will soar next year
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