"When Everyone Is Sure They Know What’s Going To Happen, They’re Wrong"
By Tyler Durden
What A Long Strange Trip It's Been
Sometimes the light's all shinin' on me,
Other times I can barely see
Lately it occurs to me what a long, strange trip it's been-The Grateful Dead, 1970, by Jerome Garcia, Philip Lesh, Robert Hunter and Robert Weir
In my last note, May the Odds Be Ever in Your Favor, I wrote “The bond market is, probabilistically speaking, an underdog to perform well over the next 2-3 years.” Since then, the 10 year US Treasury bond has fallen over 3.5%, and the yield has risen over 58 basis points from 1.75% to 2.33% as of the close yesterday. For investors who bought the 10-year thinking they were going to earn 1.75% for the next ten years, losing over two years’ worth of income in a month must sting a bit. And if they don’t change, they’re going to get stung again.
Could rates pull back a bit? Sure. It’s been a big move, fast. But as another writer I respect wrote recently, “Interest rates go from 15% to 1.3%, then go to 2%, and you think you missed it?” Retail investors who have piled into bond alternatives like Utilities and Staples in an ill-informed yield chase are going to be in for a shock when they get their November statements in a few weeks. Long-time readers know that we have been short both sectors via the XLU and XLP for awhile, and those bets have paid off. We’re not saying the move is done, but the risk-reward is now more balanced, and we’ve been paring them back. (We’re out of the XLP short completely). One trade we still like is our short in foreign sovereign debt. This short is working (down 4.7% since election day) and I think will continue to work. Negative interest rate policies are just dumb, as they eviscerate wide swaths of the economy, from pension plans to insurance companies and regular savers. I like being short stupidity, and being short negative yielding bonds is a way to do it.
On the flip side, U.S. banks are on fire. The KBW Regional Bank ETF (KRE) is up 17.1% since election day (full disclosure: I was long XLF and KRE calls before election day and am still long over half the position). Higher rates are only part of the story, and arguably, the least important part. Yes, higher rates are great for most banks, as they can finally earn a spread on their lending. Low rates were terrible for net interest margins (NIM), but with rates moving up, banks can earn a decent return again. This will in turn spur more lending, which will help the economy, particularly small businesses, where funds were tougher to get. But the big benefit for banks will be in regulatory relief. Right now, the two big numbers for banks are $10 billion and $50 billion. Not to go into too much detail here, but those …read more
Source: "When Everyone Is Sure They Know What’s Going To Happen, They’re Wrong"
