Bond Bears Reach Record High As Big Money Managers Bet Billions On 'Growth'

Bond yields have to rise, right? It's a no-brainer... tax cuts, higher spending, global synchronous recovery, inflation - what can go wrong?

And that appears to be the group-think belief of some of the world's bigger bond fund managers, who have staked more than $100 billion in one of the boldest bond bets of the post-crisis era: That a global economy firing on all cylinders would spur government yields in the West and boost emerging-market credits.

But notably, as Bloomberg reports, the wager comes in the form of bond funds that have a negative average duration, meaning they are heavily positioned for rising interest rates.

But the trades are struggling. A perfect storm -- including muted core inflation increases and relentless haven flows -- has kept a lid on longer-dated developed-market yields. Trade tensions and a stronger dollar have killed the emerging-market rally, bucking consensus on Wall Street.

“Trade tensions have hurt our European growth thesis,” argued McIntyre, who oversees $58 billion of fixed-income assets at Brandywine Global Investment Management. “We need clarity on how trade is going to unfold for our short European duration positions to outperform again.”

Franklin Templeton’s bond chief, Michael Hasenstab, has been waiting since at least 2016 for his wager -- that U.S. rates would return to a pre-crisis normal of sorts thanks to an economic upswing and diminishing monetary stimulus -- to come good.

Goldman Sachs AM’s $4 billion Strategic Income Fund has underperformed all peers in the past month, according to Bloomberg data, despite marketing itself as a portfolio that can “potentially gain in any rate environment.”

And then of course there's Janus-Henderson's Bill Gross, who has seen harrowing redemptions in the first half of the year, amounting to $580 million as a result of the worst performance of his peer group in that period, as the unconstrained fund slumped 6.3% this year through June.

And in fact bond bears have never in history had a larger short position than now...

There's just a few things.

The short-end - eurodollar curve has now inverted, suggesting the terminal rate for Fed hikes is close

The swap curve has inverted at the long-end...

And The US Treasury curve is collapsing...

And finally Dr.Copper is suggesting a growth scare is coming...

Still, everyone should just ignore the collapse of the yield curve according to Bank of Canada's Poloz, who stated this morning that he "doesn't interpret the flattening of the yield curve as a warning sign," adding that it's "due to the appetite for the long-end."

Well Mr. Poloz - why do you think there is an appetite for longer-dated bonds is so high? Anxiety over global growth?


besnook Wed, 07/11/2018 - 16:19 Permalink

inflation equals rising yields, at least that is what is suppose to happen in a real money market. since this market is far from real........

Fantasy Free E… Wed, 07/11/2018 - 16:24 Permalink

I don't know what the number is but there is a certain interest rate, higher than current numbers but not as high as you might expect, where servicing government debt is impossible.

If defaults begin in any meaningful way, central banks will lose control of interest rates. The surest way to service a lot of debt is through inflation. Tariffs will in fact create the inflation where the Fed was unable. These are some of the dynamics we will soon be dealing with.

TheBird Wed, 07/11/2018 - 16:27 Permalink

Non-spec investors (personal/funds/pensions) are happy to take longer dated paper at these yields or higher and will continue to add as rates (hopefully) continue higher. If not, at least they have something that actually pays as compared to issuances from five years ago.

Don't forget, balance sheet unwind is still at the beginning. That will continue to weigh at same time as federal deficit financing increases.

jm TheBird Wed, 07/11/2018 - 16:46 Permalink

1. I'm surprised by the demand for govvies in the face of the huge issuance this year.

2. Thinking most of the QE money ultimately made into either excess reserves or risky assets through repo, so the market action resulting from Fed balance sheet unwind will be in risk assets.  

3. If 2s10s hits ~10bps or lower by the end of the year, Fed policy should tilt to easing and the curve will steepen. 

In reply to by TheBird

Livermore Legend Herdee Thu, 07/12/2018 - 16:51 Permalink



As I said to Warren Buffett, get  $ 100 Billion Right With Conviction in the US Bond Market now and you will have a different future.


All this talk about the Bond Market, yet only one question matters:


Where will the Ten Year print in the next 4 years, far from the 3 % everyone meaninglessly talks about ?


That Trade has three legs.  Maybe you´re Lucky or even Super Smart, but you have to get all 3 Legs Right in order to both MAKE the Money and KEEP it.


For $ 500 Million I will be happy to provide that number, and Lead the way.


You say that is ridiculous ?


Is it really ?


"Frankel" can´t help, and "Chariot" will provide no insights.   Nor will "Salvator Mundi"  offer any Salvation from the Generational Peak.


Nice objects, but useless in the Bond Market.


Money made that can´t be kept or spent is a waste of Time and Energy.


Mainly that is what is going on now in "Markets". 


All of those Heavy Hitters you are talking about to the tune of that $ 100 Billion, lack the most critical ingredient of all:




That´s why Jeff and Bill changed their tune in May after I made the Buffett offer.  They don´t have the Conviction, and that´s why their "Positions" are so very fungible.


Last major point in the Bond Market was in 2010.


Bill Gross and Pseudo Guru Taleb were all the rage about how even the "Monkey" should be short.…


The "Guru" is a superb writer, and personally I like him, but sadly he doesn´t know dick about Markets.


If you don´t understand what is going on in the Bond Market you shouldn´t even be speaking.


Throw everything you´ve written in the trash can, read "Reminiscences" and get back after 10 years of practice, then maybe you know something of value in Markets.


As for Bill, he really was Rightfully "King", but he lacked "Conviction" at the critical moment.


That is most telling because, if the "King" lacked "Conviction" where does that leave the lesser men.


The last call I made here publicly was in early 2016 when I said there will be No Clinton or Bush in the White House in January 2017.




The Four Men in the best Position to benefit most from what is unfolding in the Bond Market, and in that Order:


Warren Buffett, Carlos Slim, Bill Gates and Jeff Bezos.


As for Warren Buffett, if he took the Trade AND got all three legs Right, he could actually generate more Capital than the Current Market Value of Berkshire.


Unfortunately, he doesn´t have a clue what Number the Ten Year is going to print at.


He and many others got to the Top on the "Intelligent Investor".


But for all of them that "Bible" is useless now.  And so for their Legion of Followers.


Now they need to be a Master of "Reminiscences" to get to the Bottom, for that is the true "Bible" upon which their Future rests.


As for Slim he only recently received "Reminiscences" and became aware of who Bill Gross is.


Absent the Knowledge and Conviction, he would be gambling His Future.   As I said to Slim in 2013, He was Peaking, and he has never recovered the High.  Nor will he.  His Lower Highs are being made Contemporaneously, with Massive Downside yet ahead.


Bill Gates and Jeff Bezos are Master Entrepreneurs who reached the Top through their Discipline and Talents.


But for them, the Bond Market is like Martha Stewart trying to build a rocket and and get a Man to Mars.


William Crapo Durant was also a Master and Titan of Industry.


Mastery of One does not impart Mastery of the Other.


Can´t "Roll the Dice" on a $ 100 Billion.


That´s why Buffett is in Bills, and I respect he is following My Advice.


For both Posterity and Personal Interest let me say this:


None of these individuals nor any of the unnamed "Heavy Hitters" will make those 100s of Billions that are there to made.


Either Buffett takes my offer, or he doesn´t and in the years to come it will be clear that he should have.


The Future of His Legacy and the Future of Berkshire Shareholders rest on that Trade.


In either case, I Win.


And I hasten to add there is one critical miscalculation Buffett is making: 


He won´t have that $ 100 Billion at the Real Bottom.


I won´t say what it is Publicly, but will be glad to do so face to face.


Human Nature is a Motherfucker, most especially in Markets and to those who think that their "Powers" as vast as they may be, can override that.


I have heard again and again the word "Arrogant"  and "Who do you think you are" ?


I am Nobody in the scheme of things, but I am the Man who has the Knowledge and Conviction required to make that Trade.


And I am the Man with the Best Public Record in the World on The Dollar, Interest Rates and Gold/Metals.


When the Party with the kind of Money I want who realizes that the Human Mind remains Superior in Fact and Value to any "objects" or Machines, we will get busy.


I Bet My Time that this Knowledge is more Powerful than the Money.  That Bet has already paid Millions, and I am Confident it will Pay the full $ 500 Million and Billions to follow.


We have been in a vicious Bear Market in "Talent", which when it reverses as it always does,  "Talent" will have Exponential Gain.


In the meantime Stay Tuned as the unstoppable Force of "Yield Compression" Destroys Capital and Ruins Reputations.


David Einhorn and others slow on the uptake still Fail to Realize that it is not about “them” but rather what they don´t know and don´t understand.


This Message is intended for Mature Audiences.









In reply to by Herdee