Originally published by Commonwealth Bank of Australia
- Global bond markets have attracted tremendous buying for fear of political fallout. Risk appetite has fallen as Geopolitical tensions flare up, thoughts of Trumponomics are postponed, and some recent data fades.
- The UST 10-year yield crashed through the bottom of the recent trading range (2.35‑to‑2.65%). At 2.25%, the yield on a 10‑year piece of US paper is the lowest in the “Trumponian” era (since his election in November)
- Aussie and Kiwi yields have being pulled lower with global yields, and local news/events remain very light. The widening of the NZGB to UST spread invites us to buy NZGB vs UST today.
- We maintain a short duration bias. Positioning in rates markets has mostly unwound. Rates markets had significant net‑short positions just two weeks ago, and have reversed to accumulate net longs.
Geopolitical threats remain front and centre. Fear and North Korea go hand in hand and apparently “patience” is now out of vogue. Missile launches (and failures) get politicians hot under the collar and markets heading for safety. Medium term fundamental positions are clashing with nuclear reactive war trades. War trades are sharp and violent by definition.
There have been plenty of war headlines in recent weeks – and in recent days. Market moves suggest that it’s not necessarily Trump’s foreign policy that’s driving the moves, however. The domestic policy (or lack thereof) seems to be causing much of the move too.
A typical “war trade” involves buying assets to protect wealth during the most extreme conditions. One asset of choice is gold (and silver). Gold is up just US$150 (11%) this year, reversing the Trump‑elected sell‑off. So we’re not even close to a “war” trade in gold, (yet). The most favoured currency is the US dollar, and therefore US bonds. In the post WWII era, you put your money with the “global superpower” (Dollars overtook Pounds). If a war breaks out tomorrow, the US is the likely “victor”. If they’re not the victor, we will have other problems to worry about, above and beyond assets no longer accessible. The USD is actually down since the start of the year. And down significantly since the Trump inspired rally. Disappointment in Trumponomics is having the largest impact on demand, not war. The yield on US Treasuries has fallen from a high of 2.65% to 2.25%. A meaningful rally that reflects disappointment and an orderly reversal in positioning, not panic.
Another war trade asset is Swiss Francs, and there’s been no meaningful change here. The Aussie (and kiwi) dollar hates global conflict, and both currencies are holding strong, and higher on TWI. So for all the talk of Geopolitics and nuclear war, market commentators are nervously buying into it, but traders seem to be a little more circumspect.
Instead the lack of any strong leadership from Trump in the domestic sphere seems to be doing more to aid to the rally. Over the weekend the new Treasury Secretary basically admitted than we are not going to see any tax reform package before August. President Trump is failing to deliver many of the things promised during his campaign. But in the background the US economy is actually looking pretty good. The FOMC is active not because of who the President is, or what he is doing, but because the long, protracted, post‑GFC malaise is really ending, as best we can tell.
We maintain our “fundamentally” driven short duration bias. But we add a long position in the Kiwi 10‑year as a partial hedge. The Kiwi long end has underperformed, and widened beyond fundamental improvement.
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