Bridgewater Founder Ray Dalio said back in January 2018 that “A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981.”
Well, we are still in a higher bond duration section of the Price/Yield curve where further increases in yield shifts can clobber Treasury prices.
Like the recent decline in 10-year Treasury Note prices.
Given that the US economy is exposed to an all-time high in interest rate senstivity, it would behoove The Fed to “take it easy.”
Merrill Lynch’s Option Volatiltiy Estimate (a yield curve weighted index of the normalized implied volatility on 1-month Treasury options which are weighted on the 2, 5, 10, and 30 year contracts) and the TYVIX 10-year volality index both spiked recently.
So let’s see how far The Fed will keep on pushin’, perhaps too hard on equities.
But fixed-income (bond) funds have been getting beaten since Yellen announced the end of QE in 2014, the beginning of “The Tighten Up.”
Yes, Jay Powell & the Drecks from Washington DC are doing the “tighten up.” But should they slow down?
Bloomberg has an interesting story about a former University of Chicago student of mine, Cliff Asness, head of AQR Capital in New York.
Yes, AQR and Cliff Asness are having a bad year with their “quant” strategies. Here is Cliff’s explanation: Liquid Alt Ragnarok
In short, “This has been a long post-GFC (call it near a decade) strong period for beta and a weak period for systematic value (and trend following). Most diversified liquid alts, particularly market-neutral stock selection, have not suffered until this year. Basically, factors that made up for value’s multiyear slack in the past have not done so this year. Moreover, value measures we think are superior to the academic price-to-book ratio, which have indeed helped since the GFC, have not been better this year.”
Yes, quant strategies are prone to changing market conditions and investor sentiment.
But in defense of AQR, other funds like Pimco and Janus-Henderson are having a miserable year too.
Seemingly, the lack of performance of these funds is related to The Fed’s interest rate “normalization.” And the surprising growth of the US economy allowing The Fed more room to “raise and unwind.”
Bernanke/Yellen/Powell’s famous chili (aka, Fed Chili) is throwing investment strategies a big curve ball.