Wall St. Sucks at Predicting Interest Rates, and so does Everyone Else

Raise your hand if you’ve been waiting, and waiting, and waiting for interest rates to finally rise.  No way rates could stay at zero forever we all said in 2010, and again in ’11, and ’12… and then finally in ’13 – a light at the end of the tunnel. Rates actually went up as bonds lost –4.54% ($BND).  Following that, 2014 was surely the year interest rates were going to start rising in earnest, fueled by more tapering and perhaps turning into the mother of all trend following trades.

Except… nobody remembered to tell the bond market what it was supposed to do – as rates fell in 2014 with bonds gaining ($BND +5.93%), proving us all wrong once again…

 

30 year bonds(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz 

Which brings us to lovely 2015, the year of the Sheep, where bond yields have once again made a brief run higher, moving from a low of 1.68% on the US 10 Yr to a high of 2.28% {Past performance is not necessarily indicative of future results}.  Now, your elders may scoff at 60 basis points move, but for those of us who have lived at the zero bound for the past 5+ years,  60bp is nothing to shake your head at. And it wasn’t the kindest of moves to those who systematically trade such markets – with managed futures and global macro down in February and April as the months-long up trend (in prices, down trend in rates) reversed course.

Which all leads to the $1 million $1 Trillion question – is this the move higher in rates we’ve all been waiting for?  Or are we just sheep being led to the proverbial slaughter once again believing two months of rising rates means many more months of rising rates ahead.

We’re really bad at this question

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Futures vs ETFs 4 Months In

If you haven’t seen the old ‘dead cat bounce’ in Crude Oil recently, we’re looking at a 50% or so rebound from around $40 up to $60, making our “How to Play a Bounce in Oil (Hint: Not $USO)” post quite on point, both from a timing standpoint, and from the $USO pan – with December WTI now up 6.09% YTD while the $USO ETF is only up 0.74% {Disclaimer: Past performance is not necessarily indicative of future results}.  Whether this bounce keeps bouncing or not, here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Performance as of 4/30/2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
6.09%
$USO
0.74%
-5.35%
Brent Oil$NBZ_F
6.48%
$BNO
7.05%
0.57%
Natural Gas$NG_F
-7.25%
$UNG
-8.87%
-1.62%
Cocoa$CC_F
2.07%
$NIB
1.01%
-1.05%
Coffee$KC_F
-18.73%
$JO
-22.21%
-3.48%
Corn$ZC_F
-8.93%
$CORN
-11.67%
-2.74%
Cotton$CT_F
3.45%
$BAL
11.61%
8.16%
Live Cattle$LE_F
-2.73%
$CATL
-3.04%
-0.31%
Lean Hogs$LH_F
-5.31%
$HOGS
-20.06%
-14.75%
Sugar$SB_F
-13.21%
$CANE
-12.84%
0.37%
Soybeans$ZS_F
-5.30%
$SOYB
-5.73%
-0.43%
Wheat$ZW_F
-18.29%
$WEAT
-20.30%
-2.02%
Average-7.03%-5.14%-1.89%
Average without Hogs-5.84%-5.12%-0.72%
Commodity Index $DBC-0.87%
Long/Short Ag Trader CTAs-0.02%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index

Alternative Links: Bomb Bonds

Bonds:

Bond Market Meltdown Deconstructed: Five Charts That Explain Why – (Bloomberg)

Long Crude Oil and Short Bonds? – (All Star Charts)

Cliff Asness: Investing Amid Dearth Of Value In Equities & Bonds – (Value Walk)

(Not really bonds) Moody’s cuts Chicago’s credit rating to junk – (Crains Chicago)

Managed Futures:

Managed Futures/CTA Strategies Show Favourable Performance and Liquidity Terms for Investors – (Preqin)

CTAs: Equity Hedge, Crisis Alpha, Long Volatility – True or False? – (Top Traders Unplugged)

Attain Funds April Performance – (Attain Alternatives Blog)

Miscellaneous:

Commodity markets wary of false alarm as El Niño blows back – (FT)

Every date this week is a palindrome – (Mashable)

Castleton joins oil trade titans with Morgan Stanley deal – (Reuters)

Asset Class Scoreboard Q1

The first quarter of 2015 is in the books and Managed Futures is leading the pack so far YTD of the 8 asset classes we track {Disclaimer: Past performance is not necessarily indicative of future results}. It will be interesting to see how the next three quarters play out.

Asset Class Scoreboard Table March 2015_1

Asset Class Scoreboard Chart March 2015_1

(Disclaimer: past performance is not necessarily indicative of future results.)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate,
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy (QAI)
Commodities = iShares GSCI ETF (GSG);
Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Different Exposure, Different Price

Long Only Commodities as an asset class has been plummeting since around April last year, and the downtrend continues into 2015. The average move of commodity futures in January came out to be -5.02%, compared to ETFs -7.54%, with ETFs underperforming the futures markets they supposedly track by 2.52% {Past performance is not necessarily indicative of future results}.

Here’s our monthly look at:

1. How the numerous commodity ETFs which have sprung onto the scene the past few years are tracking a simple strategy of just buying the December futures market of that commodity, under the theory that the ETF will have to roll their positions periodically throughout the year, and in doing so take on costs the simple strategy does not have.

2. How the passive investment strategy of being long commodities (either via futures or ETFs) compare to an active strategy going both long and short commodity markets via a professional commodity trading advisor (as tracked by the BarclayHedge Ag Trader Index).

(Data as of January 30th, 2015)

Commodity ETF Over/Under Performance 2015

CommodityFuturesETFDifference
Crude Oil$CL_F
-4.47%
$USO
-12.48%
-8.00%
Brent Oil$NBZ_F
-6.45%
$BNO
-10.57%
-4.12%
Natural Gas$NG_F
-6.63%
$UNG
-7.45%
-0.82%
Cocoa$CC_F
-6.02%
$NIB
-8.45%
-2.43%
Coffee$KC_F
-2.13%
$JO
-3.21%
-0.80%
Corn$ZC_F
-4.85%
$CORN
-6.27%
-1.42%
Cotton$CT_F
-2.53%
$BAL
-1.99%
0.54%
Live Cattle$LE_F
-4.20%
$CATL
-8.08%
-3.88%
Lean Hogs$LH_F
-4.21%
$HOGS
-13.59%
-9.39%
Sugar$SB_F
0.83%
$CANE
1.77%
0.94%
Soybeans$ZS_F
-5.96%
$SOYB
-6.17%
-0.21%
Wheat$ZW_F
-13.41%
$WEAT
-14.02%
-0.62%
Average-5.02%-7.54%-2.52%
Commodity Index $DBC-5.69%
Long/Short Ag Trader CTAs0.61%

(Disclaimer: Past performance is not necessarily indicative of future results)
(Disclaimer: Sugar uses the October contract, Soybeans the November contract.)
Long/Short Ag Trader CTA = Barclayhedge Ag Traders Index