Meet the next pain trade: a robust economy and sustained high interest rates
Traders of futures linked to interest rates expect the Federal Reserve to raise rates on May 3rd, and then to cut them later this year. For six months expectations of rate cuts have caused the yield on ten-year government bonds to be lower than that of three-month ones—an “inverted” yield curve that, historically, has been a harbinger of recession.500 index has risen by 14% from its trough last October; the shares of some firms—such as big tech—have done much better.
It is difficult to see how all these signals could be correct. Equally, it is difficult to see how they could all be wrong. Normally, the riskiest moments in finance arrive not when different sets of investors hold wildly contradictory views, but when large numbers of them are thinking along similar lines. Recall the near-universal fawning over tech stocks as the dotcom bubble inflated.
To see why, start with how professional investors are positioned. Every month Bank of America carries out a survey of global fund managers. April’s found them to be almost record-breakingly bearish, which on its own suggests a brightening outlook would wrongfoot many. This tallies with the contradictory signals from markets. In aggregate, fund managers have loaded up on bonds more than at any time since March 2009, pushing yields down.
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