Investors have reason to fear a strong economy
global financial crisis of 2007-09, that securitisation had transformed risky mortgages into safe but high-yielding bonds. In each case, the degree of consensus set the stage for a “pain trade": a market convulsion that hurt virtually everybody at once. Yet even among today’s mutually exclusive opinions there is a scenario that would undo investors’ positions in every market at once.
The pain trade of 2023 would be caused by a robust economy and sustained high interest rates. To see why, start with how professional investors are positioned. Every month Bank of America carries out a survey of global fund managers.
April’s found them to be almost record-breakingly bearish, which on its own suggests a brightening outlook would wrongfoot many. This tallies with the contradictory signals from markets. In aggregate, fund managers have loaded up on bonds more than at any time since March 2009, pushing yields down.
Nearly two-thirds think the Fed will cut rates in the final quarter of this year or the first quarter of next year. They are shunning the stocks of financial firms more than at any time since the first covid-19 lockdowns. Their top candidates for the most crowded trade are “long big tech stocks" and “short us banks".
Every one of these positions would be harmed by a strengthening economy and sustained high interest rates. Rising long-term yields would force bond prices down and wreck bets on the Fed cutting. Though banks’ bond portfolios would suffer, steady growth and an upward-sloping rather than inverted yield curve would boost their lending margins and help their shares recover.
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