Watching for signs that the 30+ year bond bull is coming to an end is something of a pastime here at Attain, and it looks like the anticipation has been spreading. Last month it was hedge fund bigwig Ray Dalio getting on board, and now blogger Josh Brown is making similar noises, armed with a chart from Chris Burba:
Is this it? Is this the beginning of the big bond trade we’ve been waiting for? So far, the reversal in US bonds (interest rates up, bonds down) has been one of those trades that sounds like it can’t go wrong… but just refuses to go “right.” It brings to mind another trade – shorting Japanese government debt, which has been a popular thesis for quite a while. This is another one of those trades that has earned the title of “widowmaker” for perpetually upending the wisdom of the shorts.
But we think it’s important to distinguish between how a trend-following CTA might approach this trade differently from, say, a discretionary program or hedge fund manager. Rather than getting married to a trade, a trend-following CTA will wait for a breakout (such as, potentially, the one highlighted in Burba’s chart), and then initiate a position along with a clear exit-point. If it turns out to be a false breakout, the trader will (ideally) lose only a little skin, rather than their head.
In our opinion, such a trend following model is the best way to try to profit off of (potentially) huge moves like this without getting caught in the teeth of a market that keeps refusing to revert to the mean.
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