Yesterday, when our risk management required we get out of our US bond positions, we struggled to find the fundamental reasons why rates in the US were rising faster than in Europe and Japan. The explanation we gave was that while the central banks in Japan and Europe have started or will soon start quantitative easing, the next move by the US Fed is to tighten.

After reading the Bank of Japan’s announcement last night and the FOMC minutes released today, it is clear both central banks are not changing policy. The BOJ will continue to “conduct money market operations so that their monetary base will increase at an annual pace of about 80 trillion yen” or $675 billion. The FOMC believes “The inflation rate over the longer run is primarily determined by monetary policy” and that “Total U.S. consumer prices, as measured by the PCE price index, increased 1-1/4 percent over the 12 months ending in November” vs. it’s target of 2%. The FOMC goes on to state: “The maximum level of employment is largely determined by nonmonetary factors...Consequently, it would not be appropriate to specify a fixed goal for employment”. We analyze this language to mean the Fed does not feel inflation is a problem and that full employment may not be something it can solve. So, we continue to feel the same about global interest rates as we did before we got out yesterday, in that, we expect Japanese and German rates to stabilize and not go negative while US rates come down on relative value to Europe and Japan. Given our Methodology we entered this trade with the same risk management as before, meaning a close above 2.11 on the US 10yr yield and we are out.

Given our central bank outlook, we expect the US$ to remain stable. Not until the market expects the Fed to begin tightening will we see the US$ appreciate. With the easy money coming out of Europe and Japan and the Fed not ready to tighten, we expect global equity markets to remain firm. We will be looking to get long global equities at lower prices.

Wednesday, February 18th, using the March interest rate futures, we bought a full position long in the US 10yr notes at an equivalent interest rate of 2.08%. We are now 50% invested

Modeled performance since inception, May 2012, net of all fees is +112.56%
In 2012 modeled performance (7 ½ mo.) net of all fees was +12.46% with a 10% Hurdle rate
In 2013, modeled performance net of all fees was +19.73% with a 10% Hurdle rate
In 2014, modeled performance net of all fees was +56.42% with a 10% Hurdle rate
In 2015, modeled performance net of all fees is +2.51% with a 8% Hurdle rate