Ivan Martchev lays out a strategy for investors who are convinced there will be a serious trade war.
It has been more than three years since the “Up and Down Wall Street” section in Barron’s featured a column titled “ German Bunds: The Short of the Century.”
While I would characterize the headline as bombastic, it was not the author’s idea. He was simply explaining how bond-fund managers Jeffrey Gundlach and Bill Gross felt at the time about German 10-year federal notes, dubbed bunds, and German 2-year federal notes, dubbed schatze notes, or by their full name, Bundesschatzanweisungen.
I know from experience that the forecasting business is not easy and that all forecasts are inherently wrong, since they involve moving targets that are snapshots in time. Markets constantly change, so targets constantly move, making even the best forecasts far from precise. One could say that good forecasts by definition are merely “less incorrect” than the bad ones.
Still, if after three years the short of the century has not worked out for bunds or Bundesschatzanweisungen, then this can only be characterized as a bad forecast. The bunds closed last Friday with a yield of 0.28% and have been in negative territory (as low as -0.19%) since they were proclaimed “the short of the century.” The Bundesschatzanweisungen closed on Friday with a yield of -0.66% and have been as low as -0.95% last year (see chart).
Many investors now feel that the U. S. Treasury market is a similar “short of the century.” They feel that the only way for long-term yields to go is up, because of the quantitative-tightening (QT) tsunami coming from the Federal Reserve. I shared such concerns early in 2018, knowing the annual runoff rate of the Fed’s balance sheet was slated to be increased to $600 billion, but that was before trade-war threats became big news.
To be fair, we don’t have a real trade war with China yet. The Trump administration is imposing massive tariffs with a purposeful several-week delay in order to use these threats as a cattle prod to get the Chinese to the negotiating table.
