From the always worthwhile Vimal Gor at BT:
There can be no doubt that Trump’s victory will be game changing geopolitically as it will alter the course of established diplomacy. Trump’s policies have also sparked calls for the end of the possible end of 30 year bull market in bonds as it is bringing our theme of fiscal policy taking over from monetary policy to fruition. Increasing fiscal deficits, increased debt issuance, a terming out of debt, rising wages, rising breakeven-inflation and falling output gaps all add to the bearish backdrop for bonds and bond proxies. At least you can sell government bonds here (as we have done) as they are very liquid. The main losers from this shift are the recent buyers of super-long Italian 50 year bond issuance in early October, bought at eye-wateringly low yields, as they will be accruing out of those losses over a very long time (if they don’t default before that). We had a small down-month on the flagship funds; these were caused by our structural long bond positions, a large degree of which were unwound over the month.
While we have serious reservations about how high bond yields can go and how sustainable these higher yields are given the gargantuan debt load the world carries. Therefore we have closed a large proportion of our long-held structural long duration positions and reduced the size of the portfolio materially. In this newsletter I look to set out the medium-term view and highlight a number of the potential problems.
It will be a bumpy ride either way as bond bear markets are much more volatile than bull markets as short positions are negative carry to run and turnarounds in positioning can happen very quickly. The other complicating factor is that as US bond yields rise they make other assets more vulnerable to a sell-off, which introduces a self-correcting mechanism to yield selloffs, and these factors include; a higher discount factor, slowing economy, stronger currency, overseas earnings translation effect, tightening credit conditions, etc etc. We have long wished for the return of volatility and it is finally arrived, I couldn’t be happier about the opportunity set going forward.
