Talking Points:
• Interest rates will not rise to pre-crisis levels for many years, though carry will return much earlier
• Anticipation of higher returns generates a meaningful speculative phase before actual yield advance
• Yet, the next swell of yield anticipation needs a speculative purge to truly gain ground
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We are years away from returning to yields that the global economy offered before the Great Financial Crisis. That said, the speculative markets are already pursuing the carry trade. Near zero rates across the world mean there is exceptional sensitive to even modest changes in policy - a QE upgrade, Taper, or even the first rate hike from the zero bound. Anticipation of higher yields leads speculative interests to position for anticipation of the heavier flows to follow months or years down the line when the returns meet the needs of the slower-moving, deeper-pocketed funds. We can already see this shift with currencies like the Dollar or pairs like EURUSD. The anticipation of higher returns will eventually grow more pervasive; but in the mean time, the 'earlier mover' premium may have been significantly deflated. A broad, speculative deleveraging may be needed to seed the next leg of the market's long-term recovery. We update this early stage of the carry trade return in today's Strategy Video.
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