We have highlighted winners & losers from the last week market rout.
Впервые детали зарубежных инвестиций одного из кандидатов в президенты России стали достоянием общественности. Чему хорошему можно научиться на этом примере, а что ни в коем случае не следует повторять?
One month ago, we wrote an article laying out i) what we thought was the most important correlation in the market, namely that between the 10Y yield and the S&P500, and also ii) explaining why in the aftermath of the February 5 vol explosion, it had flipped. Specifically, we said that "the 90-day correlation between stock (SPY) and bond (TLT) markets has surged ominously in the last few weeks." Today, none other than fixed income derivatives trading legend, Harley Bassman, picks up on this especially relevant topic, to explain why it really is all about the correlation. For those who may be unfamiliar, after building out Merrill's mortgage trading floor basically from scratch, then moving to the buyside at Pimco, last summer Harley Bassman, more familiar to many traders as the "Convexity Maven" - a legend in the realm of derivatives - he designed the MOVE Index, better known as the VIX for government bonds - decided to retire (roughly one year after his shocking suggestion that the Fed should devalue the dollar by buying gold). But that did not mean he would stop writing, and just a few months after explaining why "a decline of as little as 4% in one day could start a critical crash", a prediction which was confirmed by last month's volocaust, today Bassman provides the answer to a question which virtually every trader is asking: when should one worry, and when will the real bear market start? While the full - and detailed answer is provided in the full report below - his summarized answer, "for the record", is that "the real bear market will start once the long-term correlation between stocks and bonds flips for good." As he explains, the reasons for this correlation quake are manifold, but would likely involve ten-year Treasuries rising above 3.25%. Such would require a domino effect of the Fed raising rates three or four times, which of course would be precipitated by rising inflationary expectations. He also points out that there is a risk of a "friendly fire" scenario "of inadvertently stumbling into a Trade War, which is suddenly no longer a Black Swan event. While China cannot reduce its Treasury holdings without elevating its own currency, it certainly could threaten to sell Treasuries. Since provocative political bluster is now de rigueur, a few tweets from the Bank of China could be quite effective." And while we would go a little further, and say that one should keep a close eye on the USD and funding markets, the current state of the tech bubble, vol gamma, the Libor-OIS, the 10Y yield, and of course, overall market liquidity, which as Goldman yesterday finally admitted is "the new leverage", we fully agree that perhaps the most important "reversal" indicator would be the bond-stock correlation, and specifically the moment when it no longer reverts. Bassman's full thoughts below (pdf link): “How will I know…..” Last summer, in “Rambling near the Edge” (July 10, 2017), I highlighted that a combination of Risk Parity and Volatility Targeting strategies had contributed to a negatively convex market profile; and that such portfolios governed by a rules-based risk management process (similar to a Value at Risk – VAR paradigm) could become quite unstable in a slightly more volatile environment. An extension of this observation led me to suggest that one could synthetically model this risk profile as long an Index portfolio plus short a +/- 4% out-of-the-money strangle (on the Index). Thus, the quotable notion that as little as a 4% decline of the SPX in a single day could be enough to create the critical mass needed to shake portfolio managers out of their FED-induced somnambulance. I suppose better lucky than smart………. I doubt you need reminding, but on February 2nd the SPX closed down 2.1%, which elevated the VIX from 13.5 to 17.3; a level last visited in August 2017 and still well below its ‘forever average’ of 19.3. The next day, February 5th, as shown below, the SPX experienced a late day tumble that clipped down 4.5% from the prior close before the bell rang to record a 4.1% daily decline. The VIX crossed 20 soon after lunch, and closed the day at 37.3, up 116%. Portfolio managers governed by tight stops or reliant upon short-term signals had to close out positions as the VIX breached 50 (overnight) for only the second time since the Lehman collapse. The jump in the VIX, and the schadenfreude-laced news that the best investment strategy of 2017 (XIV) collapsed by 95% overnight, has been well documented by the press and other pundits. What has not been detailed are the contributing factors and what may presage a much greater drawdown. Expanding upon a notion detailed on page 6 of “It’s Never Different This Time” (January 29, 2018), the level of Implied Volatility is important for quantitative portfolio management as more than just a scalar measure of risk, i.e., VIX as the infamous “Fear Gauge”. Implied Volatility also generates the Greeks (delta, gamma, theta and vega) that define trading parameters and trigger stop-outs. Hence, unanticipated market movements can force indiscriminant hedging activity as risk managers suddenly outrank their CIOs. Whipping out a pen from my plastic pocket protector, an (annual) Implied Volatility of 19.3% (the VIX average) can statistically be reduced to a single-day standard deviation (often called the daily breakeven) of 1.21%. [19.3 / 15.9 = 1.21; where 15.9 = square root of 252 trading days] The line below is the VIX for the prior year, which averaged about 11.25. Playing a bit fast and loose with Stat 101, this would impute a daily volatility of 0.71%. That makes the 4.1% close-to-close change on February 5th a 5.78-Sigma event (4.1 / 0.71), which should occur about once every 2 million years. A fairer proposition would be to use the VIX close on February 2nd of 17.3. By that measure, the February 5th drawdown was a mere 4-Sigma event, which should only occur once every 31,560 days, or 126 years. My purpose here is to highlight how totally unprepared much of the investment community was for what in hindsight was a rather pedestrian correction. After an extended period of low (but not unprecedented) volatility, many risk models dialed-down such that an annual July 4th fireworks display suddenly was treated like a once-in-a-lifetime visit from Halley’s comet. In the more common environment of the VIX at 21, a 4% move would be expected to occur about once every three years, which sounds about right. The point of this rather long preamble is to explain how quantitative investment management can be problematic. Specifically, strategies that rely upon short-term signals and have narrow loss limits can be forced to transact at unfavorable times; thus were many managers shaken out of otherwise fine investments. I believe the main reason February’s convulsion was relatively contained, with almost a full recovery of the SPX and a return of the VIX to a more normal 17ish, is that ‘short-signal’ managers control only a relatively small portion of investment capital. The ‘big money’ tends to make decisions using longer observation periods to reduce both the statistical noise as well at the transaction costs associated with increased activity. Hence, there is no need for position adjustments until there is a more sustained decline. Let’s segue to the topic at hand. Among the most successful macro portfolio managers have been those engaged in the Risk Parity strategy. Using a broad brush, a Risk Parity portfolio owns both stocks and bonds in statistical proportion to their volatility and correlation. The trick is that, instead of a standard unlevered 60/40 construct (60% equity + 40% bonds), leverage is employed to take advantage of the relationship between these two assets. For example, an ordinary passive investment portfolio of $100 might buy $60 of the SPX and $40 of US 30-year bonds. Alternatively, a Risk Parity portfolio of $100 might own $70 of SPX and $130 of bonds. On its face, this may seem imprudent since $200 of assets have been purchased with only $100 of capital; but in fact, this sort of portfolio has proved less volatile over the recent past. This is because stocks and bonds have exhibited a significant negative performance correlation over the past decade. (Well, actually they are positively correlated when measuring changes in the SPX’s price and the Bond’s yield.) Above is the three-month moving average of the three-month correlation between the SPX price change and the Sw30yr yield change. What is most salient to note is how this correlation was close to zero in the decade prior to the Great Financial Crisis (GFC) but has since clocked in near 40%. There are two common explanations for this shift to a stronger correlation. The first postulates that this is the result of the heavy hand of Financial Repression. The obvious support for this notion is the lurch to correlation soon after the start of Quantitative Easing (QE) by the Fed. The alternative explanation is that the stock-to-bond correlation has been observed to be well associated with the level of Inflation. During times of low inflation, a rate decline can signal economic weakness, which is negative for stocks (bonds prices up / stock price down - positive correlation). However, at times of higher inflation, rising rates would presage a Fed tightening of monetary policy, which could pressure equities lower (bond prices down / stock prices down - negative correlation). While it is possible that the presently elevated positive correlation could be related to a low and steady CPI, it is unquestionable that QE is a direct result of low inflation. Its purpose was to raise Inflation to the Fed’s target level. Notwithstanding the above, I see no reason to untangle the chicken from the egg; QE will revert to QT (Quantitative Tightening) as inflation begins to rise. Thus, we arrive at a truly strange anomaly, the result of a well-intentioned public policy that seems to have inadvertently contributed to our disruptive politics. As noted, since the GFC in 2008-09 there has been a high correlation between the daily changes in stock prices and bond yields – when stock prices go up, bond prices go down, and vice versa. As such, one should suspect that if stock prices are near a record high, bond prices might be approaching some sort of nadir. Instead, both asset classes are near the upper edge of a decade’s performance. This is possible because of the different time periods used to measure correlation. On a daily basis these assets have been self-hedging as they have wiggled in opposite directions as buffeted by the news of the day. But over the longer-term horizon, they have both been elevated via Central Bank monetary expansion; a key contributor to rising income inequality. Risk Parity’s tremendous success is revealed via the SPX price in the chart above and the price of a constant 30-year treasury bond. Risk Parity portfolios have been ‘levered long’ assets that have both increased in value. (We used to call this a Texas-hedge.) Here is the bottom line: If this correlation turns negative so that both stock and bond prices decline, Risk Parity portfolios will be modified to reflect these new correlations and volatilities. In simple terms, they will sell. Risk Parity portfolios will not remain levered long if both assets are declining. So you want to know when to worry ? For the record: The real bear market will start once this correlation flips. Reasons this could occur are manifold, but it likely would involve ten-year Treasuries rising above 3.25%. Such would require a domino effect of the Fed raising rates three or four times, which of course would be precipitated by rising inflationary expectations. Of course, there is also the ‘friendly fire’ scenario of inadvertently stumbling into a Trade War, which is suddenly no longer a Black Swan event. While China cannot reduce its Treasury holdings without elevating its own currency, it certainly could threaten to sell Treasuries. Since provocative political bluster is now de rigueur, a few tweets from the Bank of China could be quite effective. Your comments are always welcome at: [email protected] Harley S. Bassman March 19, 2018
Below we share with you three top-ranked PIMCO mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy)
Below we share with you three top-ranked diversified bond mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy)
In a series of recent articles I reviewed how style analysis can be used to replicate investment strategies and indexes using only historical returns (see here, here, and here). That’s a powerful application, but it only scratches the surface for productive uses of style analysis. What else can you do? Monitoring asset weights via a […]
Uncertainty over Trump's new tariffs makes investment in mutual funds with high Sharpe ratio a strong investment choice
Главные новости- Трамп анонсировал 25%-ный тариф на импорт стали, 10%-ный тариф на импорт алюминия со следующей недели. Председатель Еврокомиссии Юнкер ответил, что ЕС ответит “твердо и соизмеримо”. Комиссар ЕС Мальмстрём предупредила, что подобные действия Трампа могут привести к “опасному домино-эффекту”. Фондовые рынки отреагировали негативно, индекс Dow Jones упал на 1.68% в четверг (третий день подряд). Нефть снижалась до 63.50 долл. за баррель Brent. Но на forex доллар упал, евро-доллар поднимался к 1.2280. - Опрос Bloomberg показал, что большинство экономистов ожидает задержки в смене языка целеполагания ЕЦБ по ставке, в соответствии со вчерашним сообщением агентства со ссылкой на источники в ЕЦБ. Министр финансов Франции Ле Мэр заявил, что по поводу кандидатуры на замену Драги не идет торг в формате север Европы против юга Европы. - Глава ФРС Пауэлл, выступая на слушаниях в Сенате, в части ответов на вопросы, заявил, что ожидает роста зарплат, но не сделал новых “ястребиных” (в пользу более жесткой политики ЦБ) заявлений. Представитель ФРС Дадли заявил, что ФРС должна будет рассмотреть воздействие повышения пошлин на перспективы инфляции. Бюджетная политика “становится весьма стимулирующей”. - Ричард Кларида из Pimco стал главной кандидатурой на должность вице-президента ФРС, сообщает Bloomberg. - Движение “Пять звезд” не рассматривает выход Италии из еврозоны, заявил кандидат в министры финансов от партии Ровентини. - Лидер испанских сепаратистов Пучдемон заявил, что “временно” снимает свою кандидатуру на должность президента Каталонии. - Агентство Reuters сообщает, что сегодня премьер Великобритании Мэй представит свое видение по сделке по Брекзиту, которое будет глубже и шире, чем любое соглашение по свободной торговле где-либо в мире. - Продажи автомобилей в США в феврале упали вопреки ожиданиям роста, с 17.07 млн. автомобилей в год до 16.96 млн. автомобилей в год (прогнозировался рост до 17.2 млн.) - Глава ЦБ Японии Курода заявил, что выход из количественного смягчения, в случае необходимости, состоится в 2019 финансовом году. Заявление вызвало падение пары доллар-иена к 105.70, близко к 2.5-летнему минимуму от 16 февраля. - Уровень безработицы Японии упал в январе до исторического минимума в 2.4%. Инфляция по индексу потребительских цен в Токио в феврале выросла с 1.3% г/г до 1.4% (прогноз 1.4% г/г), стерневая инфляция выросла с 0.4% г/г до 0.5% (прогноз 0.5% г/г).Источник: FxTeam
NEW YORK (Reuters) - Richard Clarida, an economist at fund manager Pimco, has emerged as a front-runner to become the Federal Reserve's next vice chair, according to two people familiar with the effort to fill the depleted upper ranks of the U.S. central bank.
NEW YORK (Reuters) - Dan Ivascyn, the group chief investment officer at Pacific Investment Management Co (Pimco), eschews making big, splashy investment or market calls, unlike his legendary...
Portuguese authorities are investigating 2015 debt sale to US asset manager
(Bloomberg) -- Инвесторы рынка облигаций развивающихся стран переходят на бонды в национальной валюте.Возьмите VanEck Vectors JP Morgan Emerging Markets Local Currency Bond ETF, крупнейший биржевой фонд, ориентированный на локальные бонды EM. С начала года приток средств в него превысил $1,1 миллиарда, что в 3,5 раза больше, чем за тот же период...
(Bloomberg) -- Не все разделяют мнение Билла Гросса о том, что рынок облигаций вступил в "медвежью" фазу.Его бывшие коллеги из Pimco осторожно возвращаются в бумаги, в наибольшей степени подверженные рискам, связанным с изменением процентных ставок, при том что доходность 10-летних казначейских облигаций приближается к психологически важной...
The transcript from this week’s MiB: PIMCO’s Jerome Schneider is below. You can stream/download the full conversation, including the podcast extras on Bloomberg, iTunes, Overcast, and Soundcloud. Our earlier podcasts can all be found on iTunes, Soundcloud, Overcast and Bloomberg. ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio. BARRY RITHOLTZ, HOST: This weekend on the podcast, I have an… Read More The post Transcript: Jerome Schneider, PIMCO appeared first on The Big Picture.
This week, we speak with Jerome Schneider, head of short-term portfolio management and funding for PIMCO. Morningstar named him Fixed-Income Fund Manager of the Year (U.S.) for 2015. He grew up in Oklahoma, and describes the oil crash of the 1980s. That affected him, as we watched the roughnecks and overall economy of Oklahoma suffer. The crash resulted in… Read More The post MiB: PIMCO’s Jerome Schneider appeared first on The Big Picture.
And so we reach the last auction in what has been a record supply of over a quarter trillion in bills and coupon notes this week, with today's sale of $29 billion in 7 Year paper. Continuing the trend set by the recent 2Y and 5Y bond auctions, today's 7Y year was mediocre at best but certainly not a disaster. The auction stopped out at a high yield of 2.839%, a tail of 0.7bps to the 2.832% When Issued, far above the 2.565% in January and the highest yield since March 2011. The internals were also average, with the Bid to Cover dropping from last month's 2.732 to 2.488, below the 6 auction average of 2.53 Indirects also declined, dropping from 78.1% to 62.3%, below the 66.7% 6-average, and with Directs rising from 10.2% to 15.6%, perhaps as a result of Pimco buying again, Dealers were left with 22.1% of the award, double last month's 11.7%.
In the second of the week's coupon auction, the Treasury sold $35 billion in 5Year notes at a yield of 2.658%, right on the screws with the When Issued, and the highest yield going back to December 2009. Similar to yesterday's 2Y auction, the internals showed some weakness - which is to be expected in a week of record supply - but certainly failed to suggest a notable lack of demand, even if the Bid to Cover dipped modestly from 2.48 in January to 2.44, below the 6 auction average of 2.47. The closely watched Indirects were awarded 58% of the takedown, a drop from last month's 65% and below the 64.9% 6 month average; Directs ended up holding 12.9%, perhaps as Pimco stepped up in line with earlier comments, above January's 9.1%, and above the 6MMA of 10%. This left Dealers with 29.3% of the auction, modestly above January's 26.0% and above the 6 auction average of 25.1%. Overall, a somewhat mediocre effort which leaves tomorrow's 7Y as the auction to watch, especially after today's FOMC minutes which may well surprise on the hawkish side, potentially leading to even further weakness.
06.03.2016 г. на ресурсе China Matters появилась публикация, очень точно нацеленная на нанесение репутационного ущерба Х.Клинтон в контексте предвыборной кампании в США Название статьи: «Ливия: хуже, чем Ирак. Прости, Хиллари». Ливийское фиаско может оказаться камнем преткновения в президентских притязаниях Хиллари Клинтон.
Новым президентом Федерального резервного банка Миннеаполиса стал бывший топ-менеджер инвестбанка Goldman Sachs и фонда облигаций PIMCO Нил Кашкари.
Вкладчики забирают свои деньги из американского фонда PIMCO . он потерял больше 20 миллиардов долларов. Так инвесторы реагируют на уход из компании одного из основателей Билла Гросса. А вот акции фонда Janus Capital, в который легендарный инвестор устроился на работу, стали пользоваться повышенным спросом. Как на этом заработать?