Morgan Stanley's Jim Caron Apologizes For Wrong Call On Bonds, In 180 Degree Move Now Recommends A 10s30s Flattener
One of the biggest economic bulls, and correspondingly bond bears, of the past year, has been Morgan Stanley's Jim Caron, whose earlier estimate of a 5.5% in the 10 Year has cost many a bond investor much money. Today, Caron appeared on Bloomberg Radio with Tom Keene, apologizing for his call, and following up on his latest release in the MS Interest Rate Strategist, which started off: "We got our rates call wrong and missed a great opportunity to be long bonds this year. The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward. We’re shifting gears and will become more tactical, playing for rate moves in either direction in shorter timeframes, rather than having our ideas hinge on longer-term macro themes." Indeed, relative value, in the form of various divergence and convergence trades, is where it is at, and where Zero Hedge has been focusing over the past year.
Keene asks Caron what he got wrong. The answers:
- The amount of money staying, and accelerating, into bond funds - $190 billion and climbing according to ICI
- The expected upswing in equities on the back of a 3% growth in the economy "didn't happen"
- A shift in expectations as people just want to get their money back: "want safety and liquidity of bonds, more than take the risk of entering into riskier assets like equity"
- The economic data starting to turn
- And, of course, the Fed...
Yet Caron still is not joining the bond bulls. Instead, as we have discussed over the past week, Caron's preferred trade is to own the front end (and collect absolutely nothing), up to 5 years. Oddly enough, according to today's interview Caron also likes the 10s30s flattener all of a sudden, which as we pointed out, was Bank of America's preferred trade last week, even as MS was actively calling for more steepening (see here for Caron's view on bonds as of one short month ago). So there you have it folks: Morgan Stanley, after almost half a year of abuse from clients, has now capitulated and is firmly in the flattener camp. And now that even chartists are pointing out the double top in yields, we, being ever so gently contrarian, are now gradually positioning with a steepening bias on the curve, as being on the same side as the groupthink has never been our thing.
Incidentally, all of this is not to disparage Caron - he preached what he thought was right. It merely shows, once again, that when the Fed is the dominant market force, the market makes no sense, period, and the only logical trade continue to be frontrunning our central bank, until the moment when all the other central banks gang up on it, in the 21st century equivalent of traditional warfare, and the trade is no longer "logical." We will discuss the just released piece by Caron: "A New Leaf: Becoming More Tactical" over the weekend.