The Brand New 'Pain Trade'

In markets, the “pain trade” is when some asset goes in a direction that causes the most pain to the most amount of people.

In a note to clients this evening, Mike O’Rourke of JonesTrading dubbed falling Treasuries (and therefore surging yields) the new pain trade:

Much of the pain trade talk over the past two years has been the move higher in equities.  These days, there is a new pain trade–being long bonds. There is a major tidal shift occurring here.  Following 5 years of the Federal Reserve, Commercial Banks and investors piling into bonds the momentum is finally reversing.    

Normally, we would take the view that investors should not be scared of a 10 year Treasury yield below 3%. The problem is that the behaviour of the buyers of these instruments over the past few years has hardly been normal. 

He goes on to note how EVERYONE has piled hard into Treasuries since the crisis.

Obviously one big buyer has been the Federal Reserve (though as it prints money, losses don’t mean much to it).

On the other hand, banks and retail investors have bought gobs of safe fixed income products in recent years.

This chart shows equity vs. fixed income fund flows since 2007. The divergence is epic.


This one shows how commercial banks have loaded up the boat.


The surge in interest rates in the US is the big story.

From a purely trading standpoint, O’Rourke is dead on that this is catching a lot of folks with their pants down.

This tweet from PIMCO today — whose bond funds have been getting rocked in the Treasury selloff — was quite startling to see.

And of course, outside of markets, there’s a big question about whether the rising rate environment is merely a sign of stabilisation, or an actual threat that could derail the recovery once again.

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