The past few years have seen large moves in global yields. To (very briefly) recap, at the end of 2018, US 10-year yields were around 3% on the heels of recent rate hikes. Late in 2019, the escalation of trade tensions between the US and China led the Fed to enter a mid-cycle course correction taking yields down under 2%. The pandemic at the start of 2020 prompted emergency cuts everywhere and moves to record low yields close to 0.5%. Yields started rising again as the economy reopened, and as inflation reared its ugly head in 2022 global central banks found themselves behind the curve. The US 10-year touched 5% for a hot second in late 2023 before falling to 4% at year-end. Rates bounced around in 2024 as markets grappled with several rounds of “the Fed needs to cut” to “rates will be higher for longer.” Now, inflation near target and the balance of worries has shifted from the inflation to questions of soft landings and slowdowns.

Shifting yields mean moves in bond prices. Bonds performed well through the pandemic, then suffered historic drawdowns. After decades of negative stock/bond correlations (which we have written about here) the positive correlation came as a shock to portfolios, particularly those that were levered. We have long believed that Managed Futures strategies are valuable in portfolios of traditional assets as they are incredibly adaptable in nature, being able to participate directly in markets that may be impacting stock valuations (rapidly rising commodity prices in wars for example, or rocketing global yields). Crucially, Managed Futures is able to be short markets as well, giving access to both sides of return distributions. This adaptability allows Managed Futures to offer diversification and uncorrelated returns in sustained moves in either direction, an improvement over long only approaches in some environments. The shifting yields period of the past few years is particularly illustrative we think, highlighting the value of both long and short exposures. Also interesting – we are old enough to remember the charge that Managed Futures was only a levered long bond position, that the strategy would be unable to make money in rising rate environments, and that the performance was an artefact of a never to be repeated secular drop in global yields. That one didn’t age well – Managed Futures performed well through the inflation and rates periods, particularly in 2022 when equity market performance was most challenged.

The chart below shows constant maturity US 10-year yields (orange, left hand scale) and a simple trend following signal using a one-year lookback (blue, right hand scale). On the right axis, negative values show exposures to falling 10-year yields through long positions in bonds, positive values show exposures to rising yields through short positions in bonds. Through the pandemic period, Managed Futures picked up the drop in yields and positioned long in bonds, generating returns. From early 2021 through a mid-2024, fairly consistent short positions in bonds generated returns from rising yields. Some choppiness in late 2021 complicates things a little – these whipsaws are the costs of trend following. The perfect exit for a trend position like this is a long smooth period of plateau at the most extreme levels. Real life is never so kind, trend following will always be in at what turns out to be the peak. This period though was decent, the model positions flipped at reasonably good levels and have captured the recent pricing of central bank pivots, shifting to exposures that benefit from lower yields through a long position. The sharp and fairly short-lived drop in yields at the end of 2023 that then reversed close to new yield highs helped slower simple systems like this one. Of course – time will tell in due course whether the recent position shifts and yield moves hold.

We repeat the illustrative charts below for a few other global yields to highlight the quirks and value in diversification.

The UK endured a somewhat wilder ride in late 2022 that led to the downfall of a Prime Minister via a budget driven yield spike and a lettuce. Germany saw markedly negative 10-year yields amongst others. Japan in particular looks a little different given the different dynamics at play, we have written on those as it relates to the currency here and here, which incidentally has been a much better place to express the shifting economic policies than fixed income markets – another example of diversification and adaptability.