Fixed Income is Dead, Long Live FX

In 2019, fixed income was king. Many macro funds turned to rates RV and duration trading, and many went as far as shutting down currency risk taking. This trend was also prevalent within pension funds. They focused on equity and credit beta, and the hedging benefit offered by duration, while ignoring FX opportunities.

But then came COVID19, which has pushed all major fixed income markets toward zero. In g10, the highest 2y rate is 0.29 pct (in New Zealand), and the average 10y rate is at just 0.20% (dragged down by negative rates in Europe). Meanwhile, volatility has collapsed: Yield volatility in the US, as captured by MOVE, made new historic lows last week.

Global central banks continue to play an outsized role after having successfully suppressed the risk parity unwinds that predominated in late March. Looking ahead, fixed income volatility is unlikely to come back quickly, unless global inflation sees a dramatic regime shift. In fact, any temporary fixed income volatility is likely to be met by ‘Yield Curve Control’ policies, as already adopted in Japan and Australia.

At the same time, global FX markets have come back to life. EURUSD has moved almost 10pct since the European Recovery Fund was announced on May 18, and we have seen a significant USD weakening trend more broadly, especially in g10 (with CVIX 75% of the pre-COVID lows, and interbank volumes are up significantly).

For institutional investors, capturing some of these FX moves will be crucial to performance. There is little to no carry left in traditional sovereign bond markets, and the potential for duration rallies is also dramatically diminished. On a relative basis, FX now offers much more potential for alpha generation, although no strategy is without risk.

This year has been a special one for the team at Exante Data, and our early focus on COVID19 has been important to the quality of the analysis and advice we have provided. But we never stopped focusing on FX, and we are happy to observe that investors are coming back to the asset class, and expressing renewed strong interest in our FX expertise.

This trend will continue. Institutional investors will have to adopt and be willing to take more risk, and generate returns in global FX; for some, perhaps even via new exposure to Chinese bonds. Taking currency risk effectively, may even be a matter of survival. Long live the new king, FX.

Jens Nordvig
Founder and CEO
Exante Data Inc.

Links to some previous public letters:

On the Rise of Alt-Data (July 7, 2020)

FT-op-ed: Did anyone notice that the Macron-Merkel plan is a very big deal (May 21, 2020)

How long must we do this: On optimal Social Distancing (April 16, 2020)

COVID: In a time of macro crisis, we would like to thank our clients (March 5, 2020)



Exante Data © 2022. All rights reserved. Personal Data Usage Policy

This site is provided for informational purposes only.  The information included in this site should not be used as the sole basis for making a decision as to whether or not to invest in any particular security. In making an investment decision, you must rely on your own examination of the securities and the terms of the offering. You should not construe the contents of these materials as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security.

The information included in this site is based upon information reasonably available to Exante as of the date noted herein. Furthermore, the information included in this site has been obtained from sources that Exante believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. Information contained in this site does not purport to be complete, nor does Exante undertake any duty to update the information set forth herein. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, by Exante, its members, partners or employees, and no liability is accepted by such persons for the accuracy or completeness of any such information.

This site contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of certain investment strategy. All are subject to various factors, including, but not limited to, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting the operations of the companies identified herein, any or all of which could cause actual results to differ materially from projected results.

Get more information about Exante Data
Get Ahead With Our Updates with Our Exante Newsletter