Willingness to admit that you have been wrong is undoubtedly an admirable quality.
Morgan Stanley’s Head of U.S. Interest Rate Strategy, Matthew Hornbach, did just that in a recent note to clients after Federal Reserve Chairman Ben Bernanke surprised markets and sparked a sell-off in Treasury bonds last week in his testimony before the Joint Economic Committee of Congress (emphasis added):
Investors who have followed our research will have recognised our propensity to increase conviction in a view at precisely the wrong time. We tend to increase our conviction as the markets move in the direction of our view very much the same way that investors are supposed to add to winners (and cut losers short).
Last week, we advised investors to add to their 7s/30s and 10s/30s yield curve steepening positions with the view that Chairman Bernanke would calm expectations for tapering by September this year – helping keep rates and volatility low. These curves have since flattened back to the levels at which we suggested investors enter steepeners. Given the uncertainty Bernanke injected into the market, we suggest investors pare down positions to more sustainable levels. At the same time, we keep to our core steepening view.
We have held a core curve steepening view primarily between the high carry and expected rolldown sectors of the yield curve (5~10-year maturities) and the long end of the yield curve. We have held this steepening bias to varying degrees every week since June 29, 2012. The two exceptions occurred when we turned neutral on the curve on April 19, 2013 and remained neutral until April 26, 2013.
Of course, Hornbach is far from the only one to have been caught off guard by Bernanke last week – but he confronts it in a remarkably candid fashion and adjusts his view accordingly.
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