In a previous note, I described how the economic policies implemented from 1980 to 2016, tended to lead to the same action and reaction in currency markets. And it was possible to trade the reaction in currency markets more cheaply via equities. Now, in the new era that we live in, the “pro-labour” era, where policy makers are trying to raise real wages, the action and reaction seems to exist in bond markets. The problem is that it is no longer as cheap as it was to short US treasuries. Back in 2020, 30 year treasuries yields 1%. If your view was that they would go to 3%, as a rule of thumb the capital loss would roughly 50%, with a carry cost of only 1%. A no brainer trade.
Today, being bearish on bonds is trickier (we will only focus on the 30 year - where yield changes generate large movements in capital values. As a rule, 1% increase in yields leads to 25% fall in capital values). The big issue is that the carry cost of putting this trade on is not 4.3% a year AND you run the risk that yields call, giving you a capital loss as well. Is there a way around this?
