Friday 28 February 2020

Where are Treasury yields going from here?

Yields have cratered this week on *fears* of the Coronavirus, which had killed a total of 2800 Chinese (about 2 weeks worth of road traffic fatalities in China). 

The virus will be less contagious in April as the temperatures warm up, but I accept its likely to spread more before then. 

Overall it is a narrative, the real story is that risk assets were inflated and the real economy has been slowing to near recession levels for months, hence low bond yields and Corona disruption is just the final straw for the slowdown/ recession scare in H1-2020

TSYs started rallying the moment the Fed stopped growing its balance sheet in the new year

I think the Fed probably does a 50bps and 25bps cut in the next two meetings, probably in that order and 10yr Treasury yields bottom in the 2nd week of April at perhaps 75-85bps

And from that level, given the 'MMT politics' they are an absolutely terrible medium term investment

Question is what will be the good investments?
  • High div yield, low multiple, high quality, low ESG score US extractive industry and smoke stack stocks, some have a 6% yield already, but I think can fall more first
  • Distressed EM sov debt
  • GARP EM equity in the better EM countries
  • Dislocated credit. So if spreads blow out, then buy them as a mean reversion trade
  • If EU agree a fiscal pact then I would look in the EU
  • UK GARP names, I have been told UK plc names outside the index are lowly valued
  • Gold
  • Structured bonds paying curve steepness, coupons like 2-10 spread x4 or 5-30 spread x 8 , as the US curve should steepen when the market realises the Fed is going to stay loose as nominal GDP rises
  • Areas of private markets that are genuinely short of capital and not swamped with MBAs brandishing large cheque books, so usually any asset class that has just been through a downturn or cant be leveraged 10x

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