WAM Strategy Note: STFR in Bonds. Again
Moving WOTE US Core FICC strategy into a maximally short position in UST 20s.
Disclaimer: For informational purposes only.
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Discussion
The US economy is running with a 5-10% fiscal deficit at its back, a level of on-going fiscal stimulus that makes it almost mathematically impossible for the economy to enter recession. The deceleration in economic activity in April/May has led the bond market to yet again front-run a FED rate cutting cycle, just as the “guts of the stock market” are telling us economic data prints are going to begin surprising to the upside in the coming weeks and months.
A short long bond position here is highly asymmetric:
If the data begin surprising to the upside, rates will rise
If the Fed begins to guide toward a resumption of hikes, rates will rise
If the Fed stays on hold while data reaccelerates to the upside, rates will go berserk to the upside, especially post-Election
The only way rates move lower in a sustained manner is if we get a truly exogenous risk-off event. And even then rates may not stay down given the policy response is likely to be inflationary.
As such, building on the short position discussed in the June 5 note below, I took my WOTE US Core FICC strategy into a maximally short position of -200% via the TBT ETF.