Positioning war: asset managers vs. hedge funds
In our view, the outlook for the rates and FX markets hinges on who wins the battle of positioning. Asset managers have been buying Treasuries at a record pace while hedge funds are getting to record short levels. This divergence is both unprecedented and unsustainable. Who will throw in the towel first?
Hedge funds may have the upper-hand
In our view, the new pessimism about the incoming administration that has been weighing on rates and the USD lately should abate as the government embraces a more pragmatic than expected approach on Obamacare, fiscal reforms and China. History tells us following new Presidential inaugurations, rates and the USD tend to go up, even if the stock market does not. Leading indicators suggest that a synchronized global recovery may be underway which would provide the Fed with more room to normalize interest rates.
What we like
We still like our core short in 5y USTs (targeting 2.25%) and long USDJPY position (targeting 120)*. The biggest risk to our trades is renewed RMB depreciation.