After the FOMC meeting this week where the Fed decided to cut 50bps, we saw some interesting moves in the market. After a few down days, equities rally. But what may have been a surprise to some were moves in the bond market. The 2-year, 10-year, and 30-year rates all went up.
The 30-year mortgage rate went up as well. The market had priced in rate cuts (although the specific amount was up in the air), but the real action responded to the guidance offered by the Fed's rate outlook and Chairman Powell's post-announcement press conference. Specifically relating to mortgages, the 30-year rate bottomed out at around 6.11% before the Fed's announcement and moved slightly higher over the past few days.
Our friends at Mt. Lucas (https://mtlucas.com) always have lots of great insights, but a recent post titled "Navigating the Rollercoaster in Yields" is especially prescient and interesting:
From Mt. Lucas:
Shifting yields mean moves in bond prices. Bonds performed well through the pandemic, then suffered historic drawdowns. After decades of negative stock/bond correlations (which we have written about here) the positive correlation came as a shock to portfolios, particularly those that were levered. We have long believed that Managed Futures strategies are valuable in portfolios of traditional assets as they are incredibly adaptable in nature, being able to participate directly in markets that may be impacting stock valuations (rapidly rising commodity prices in wars for example, or rocketing global yields). Crucially, Managed Futures is able to be short markets as well, giving access to both sides of return distributions. This adaptability allows Managed Futures to offer diversification and uncorrelated returns in sustained moves in either direction, an improvement over long only approaches in some environments. The shifting yields period of the past few years is particularly illustrative we think, highlighting the value of both long and short exposures. Also interesting – we are old enough to remember the charge that Managed Futures was only a levered long bond position, that the strategy would be unable to make money in rising rate environments, and that the performance was an artefact of a never to be repeated secular drop in global yields. That one didn’t age well – Managed Futures performed well through the inflation and rates periods, particularly in 2022 when equity market performance was most challenged.
Moves in rates and yields can have all sorts of impacts on the economy and especially markets. From yield curve inversions, to un-inversions, to bull-steepeners, etc., the bond market seems like it is driving things even if we do not want to listen to it. The managed futures expertise that Mt. Lucas brings to the table is an interesting way to think about yields.
Through the pandemic period, Managed Futures picked up the drop in yields and positioned long in bonds, generating returns. From early 2021 through a mid-2024, fairly consistent short positions in bonds generated returns from rising yields. Some choppiness in late 2021 complicates things a little – these whipsaws are the costs of trend following.
Give the article a read as it has a unique and probably different prospective. It seems like Central Banks around the world, outside of the Bank of England, are dropping rates or are forecasting to drop rates through the rest of the year. "Undershooting" is a new Central Bank term that we will probably hear pretty regularly going forward as economies evaluate whether they are in a recession, how they tackle inflation, and what employment statistics are showing.
I wonder if managed futures might be something that could help investors navigate markets as news, data, and commentaries create daily volatility in equity and bond markets.
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