Whilst I said just yesterday that I’m not a fan of being “bored of brexit” and think that it’s an import chance to get everyone democratically engaged – I am bored of it in one sense. Market participants won’t stop going on about it. Here’s a few things they should be thinking about instead
1. Long LATAM, Short Asia
Asia is awash with credit and most asian economies are geared to the Chinese ponzi scheme in one way or another. With vast corporate leverage fuelling the valuations of Asian assets and currencies – the time has come to look to Latam for your EM performance. Latin American countries are doing largely sensible things from a non-Peronist government in Argentina, impeaching corrupt politicians in brazil (albeit leaving more corrupt ones in place) and pursuing sensible monetary policies and free floating exchange rates in Chile and Colombia.
2. US Steepeners
The $ curve is ludicrously flat. Go run a long only bond fund if you’re scared of running steepeners where less than one hike a year is priced into the greens. “But it carries negatively!” If one more person asks me if I know a “Positive carry fixed income short” i swear to god…
3. Long European Swap Spreads
A smart client (who hopefully isn’t reading…) points out that if you blend European ASW spreads by capital key weighting (ie, average of France, Germany, Italian spreads) you get the same as the US. Given the ECB is buying every bond germany issues that doesn’t seem right. It helps of course that European governments are gleefully hitting bids for ultra long bond issues, with Spain managing to offload 3bio 50y at a yield of 3.5% (LOL) this week (10bio worth of orders, and HF got < 5% fill in many cases) . Anyway, if you draw some lines on the chart of ASWEBOBL on bloomberg it’s really easy to convince yourself to buy some and a bunch of my smarter HF customers are!
4. Sell Equity Vol, buy Rates Vol
Central banks are hitched to the asset price train and the bond market is where they do their machinations. Typically option prices in bond markets are restrained by the fact that bond prices are supposed to reflect fundamental economic realities – but they might not if price insensitive central bankers are buying them all. Besides, equity vol is rich from all the doomsayers out there buying puts, and the ludicrous amounts of forced buyers from all those VIX ETF’s the real money crowd buy – whereas rates vol is kept in check by systematic sellers and barely has any risk premium.
As always, delighted to hear what you lot think!