Long Rates? Really? On these Levels?

The observant reader may have noticed that we have been scaling out of the short agriculturals lately, as several stops have been taken out. That theme was dominating the portfolio in December and we still hold some exposure to it, but it no longer is the core driver of the portfolio. It is in the nature of a trend following futures program that the driving theme shifts as positions are scaled in and out as the strategy tries to move to where the action is at the moment. The new main theme is somewhat scary I have to admit, but over the years I have seen even more crazy looking themes that took off in a big way and had massive positive impact so my advise as usual is to just accept it and stick with it.

The new main theme is long rates. And why is this scary? With yields at the levels they are now, the potential for bond prices to move up is quite limited, unless of course we expect the world’d largest economies to go to negative interest mode, as my adopted country of Switzerland briefly did this summer. A year ago the long rates theme seemed like a very sensible bet and it turned out to pay off quite well, but after the big moves in 2011 one has to wonder how much upside potential is left. Nevertheless, the stops are in place and the downside is limited, so we stay on target and keep taking the positions as they come along. All part of the game.

Apart from the rates theme, we also have an interest in the dollar to continue to strengthen as we are short various currency futures against it. The agricultural commodity bias is getting more balanced as we got some stops on the short side and some entries on the long side. We are short oil, gold, platinum and natgas on the non-agricultural side as well.

It has been a bad time for diversified futures traders for the past year. Despite that we have still been able to keep up with the world stock markets without seeing the severe draw downs that the buy and hold crowd has experienced lately.