Bond traders throwing their faith behind policy makers should also be thinking about how steps to shore up confidence will affect those bets, according to Jim McCormick, the London-based global head of desk strategy at NatWest Markets. A boost to economic growth would ultimately mean higher long-dated yields.
“Central banks will likely cut and unlikely unwind them when things settle, but a recovery plus more fiscal policy should pressure the back end of the curve,” he said. “The curve steepens if the combination of policy response works.”
A sobering assessment by the OECD Monday did little to assuage market panic. The Paris-based group warned of possible global contraction this quarter and cut its full-year growth to just 2.4% from 2.9%, which would be the weakest since 2009.
As the number of new virus cases in China declines, those elsewhere are climbing, with countries like Brazil and Pakistan reporting instances of the illness for the first time.
But if measures to contain and stamp out the illness take hold, China returns to work and records an upswing in growth in the second quarter, bets on expensive government bonds may start to look dangerous.
Bond momentum signals tracked by a type of systematic investors known as trend followers have turned so extreme their bullish bets are now vulnerable to profit-taking, according to JPMorgan Chase & Co.
Wariness is reflected in passive flows in the world’s most heavily traded government debt product, the iShares 20+ Year Treasury Bond fund, which shows investors’ love affair with duration may be cooling somewhat. The ETF just posted its largest weekly outflow in more than a month.
“Chasing bonds when yields are at an all-time low seems very risky,” said Mark Dowding, a money manager at BlueBay Asset Management, who has a neutral stance on duration. “At the same time it seems that news flow on the virus will get worse before it gets better.”
--With assistance from Yakob Peterseil, Justina Lee and Liz Capo McCormick.
This article was provided by Bloomberg News.