Amid global economic turmoil, investors are having a tough time looking for the next great trade, and it’s requiring many to think outside the box.
The only requirement for these investments? It has to avoid being on the tail end of any global market turbulence. That’s pretty hard to find nowadays.
The Wall Street Journal broke some of the strategies being deployed by investors in an article today, and spoke to Alfredo Viegas, an emerging-markets strategist for Knight Capital Group, who gave his argument to bet against Israeli bonds:
His theory: Investors are so focused on Europe that they are misjudging risks in the Middle East, such as a flare-up in relations between Israel and Iran, or greater conflict in Egypt and Syria.
Once they wake up to those risks, Israeli bonds are likely to tumble, Mr. Viegas reasons. In the meantime, the investment isn’t likely to be pushed one way or another by the European crisis, he says.
Though, doesn’t getting published in the WSJ mean more will be “waking up” to the risks with Israel/Iran? Sounds like Mr. Viegas’ short bet could be paying off soon.
While European government-bond yields spiked this fall, Israel’s $70 billion of dollar-denominated bonds remained relatively steady, yielding 1.4 percentage points more than U.S. Treasury bonds. That made them cheap to bet against, or short. A $100 million bet against the bonds for three months, combined with a hedging position in U.S. Treasurys would cost about $750,000, Mr. Viegas says. He says the trade would stand to make at least $5 million, and potentially much more, if a crisis erupts in the Middle East.
In order to find profitable trades that do not correlate with the erratic market nowadays, financiers are on the hunt for investments that may only be affected by certain news events—like war, bankruptcy or legal action. That’s why some have been flocking Lehman bonds too, hoping to make a profit when funds are distributed as the bankruptcy proceedings go on.