Reflation trade losers rush for the exits
Investors panicked last month as fear spread that the US Federal Reserve would soon hike rates. Momentum players of the global reflation trade rushed to unwind positions in high-yield markets. Borrowers were forced to pull deals. The panic subsided as quickly as it arose and the sell-off failed to engulf global markets this time. What happens next?
Graham Neilson, ABN Amro's global head of credit strategy, is emphatic. "This isn't 1997 again, and it isn't 2001 again. It is 1993/94, and the comparison is not lost on the market," he says. "The comment then was that rates going up presented an opportunity to buy. That was bollocks the first time around and it will be again."
The upshot of interest rate rises in 1994, as Neilson points out, was one of the biggest bond market unwinds ever. "Bond yields went from 5% to 9% and people were carried out," he says. "It challenged the assumption that you should be a buyer in a dip."
So asset allocators that have learnt their lesson will be allocating less capital to fixed income, and are keen to take profits.
"We've seen profit-taking from Asia, especially the Asian central banks, including in euros," says Dimitri Toseland, principal in the European high-grade fixed-income unit at Banc of America Securities.