Deutsche Bank Says Oil, Bond and Yen Trades May Be Due Breakby
Bonds and yen shorts and long-oil trades look ‘stretched’
Fundamentals still strong but positioning is at extremes
The new year has barely started and it’s time for a breather, according to Deutsche Bank AG.
The lender says three popular “reflation trades” -- selling government bonds, buying oil and shorting the yen -- may have gone too far.
While fundamentals suggest these trends may have further to go, Deutsche Bank strategists including New York-based Parag Thatte wrote in a recent note that the trio of consensus calls are now looking “stretched.”
1. Short positions in bond futures
Short positions in bond futures are now at their largest on record, according to Deutsche Bank, with investors holding net short positions across every maturity. However, last week saw the first inflow into rate-sensitive bond funds since the election. The inflow was small at about $800 million, Deutsche Bank says, but was accompanied by a $2 billion inflow into emerging-market bonds and further inflows into high-yield, short-term and floating-rate funds.
2. Long positions in oil
Since December’s OPEC agreement to reduce production, long positions in oil remain near a record high and short positions are close to their lowest since May 2016. The result? Net long positions have continued to build in a commodity that Deutsche Bank argues is priced at 50 percent above its estimated fair value.
3. Short positions in yen
While speculative positions in all major G-10 currencies against the dollar are short, those positions in the euro, sterling and the Swiss franc have continued to fall since the U.S. election. However, short positions in the yen have risen to levels last experienced during the dollar rally of 2014-2015, the strategists said.