January sixth, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

II. Insights 

Our Viewpoints and ideas on market.

Lessons from divergent market bets

Over the past two years, equity and credit investors captured significant market alpha on the strength of their conviction in a soft landing,rate investors were whipsawed by the market’s sharp volatility, mainly because they relied too heavily on the recession-risk assumption and favored duration-heavy asset allocations:

Treasury indices significantly underperformed USD cash:

Equity and credit investors were the ones who focused on corporate fundamentals over the past two years, they placed greater emphasis on identifying the health of the companies themselves. This focus on micro-level fundamental health reduced positions that bet on macro risk or a deviation from a soft landing, as we mentioned in our previous Notes:

With the U.S. macroeconomy broadly holding up, micro-level corporate earnings provide greater support to the market than macro risks do, corporate resilience is sufficient to hedge against economic uncertainty. In other words, strong earnings visibility is the core rationale supporting equity valuations and tight credit spreads.

Further reading:

Market Notes 24-10-31: In U.S. equities, micro-level performance outweighs macro politics

This also means that trading throughout the entire 25 year will necessarily revolve around earnings visibility, which is the key risk point for earnings-season trading.

By comparison, Rate investors’ strategies rely more on the mindset of “hedging against tail risk.”Their distinctive feature is a preference for UST long-duration positions to hedge against recession, but this strategy has repeatedly faced headwinds over the past two years. First, negative carry has significantly weakened the appeal of long-duration bonds; second, the inverted yield curve has increased volatility in long-term bond yields, directly hurting rate investors’ portfolio performance:

Divergent pricing of recession risk across asset classes is also a key factor, Over the past two years, equity and credit markets underpriced the probability of recession, while the rates market priced it too high:

This disconnect not only led to sharply divergent strategy performance, but also further confirmed the long-running conflict between macro sentiment and the corporate-health narrative.

Two key points:First, In a market marked by divergence, corporate fundamentals are crucial, following the market; overreliance on macro-driven strategies may cause investors to miss actual market signals. Second, overly concentrated asset-allocation strategies (such as duration-heavy positioning) significantly increase risk exposure, especially when market pricing mechanisms are disconnected.

Further reading:

JPM：Flows & Liquidity, 10 lessons from the past year

JPM: Flows & Liquidity, Why equity and credit investors got it right while rate investors got whipsawed?

2025.01.06

III. Market Pulse 

Our latest Comments on the economic and market environment

Start-of-year selloff in European bonds and market pricing of ECB rate cuts

In the first week of the year, Real Money investors made large-scale sales of long-end German government bonds (especially outright Bund holdings) and spread trades against 10-year U.S. Treasuries.These sales may have been intended to address pressure from the large volume of European government-bond issuance over the next two weeks.

Looking back at the selloff during the final two weeks of 12, its causes can be distilled into two points

1) Fast Money reduced positions for risk-management reasons

2) Expectations of a large volume of European bond issuance at the start of 1 triggered a market adjustment

CTA remain long European interest-rate duration positions and are expected to sell mainly key instruments such as Schatz, Bobl, and Bund if the market moves sideways.

At the short end of the yield curve (short-term government-bond yields), as natural gas and crude oil prices rose in tandem with the dollar, The market revised its expectations for the possible scale of rate cuts at the European Central Bank (ECB) rate decision in 2025 9, reducing expected rate cuts by 10 basis points.

ECB Executive Board member Stournaras said that interest rates would reach around 2% in the autumn. His remarks triggered selling at the short end of the curve.Although Stournaras is not the most influential member of the Executive Board, his stance is extremely dovish and no other board member has challenged him, a new narrative is now emerging in the market that“European markets have priced in too many rate cuts”, making the risk-reward favor short euro-area rates. This suggests that The first two trading days of the new year were driven mainly by selling amid inadequate market liquidity.

Looking ahead to this week, European inflation data and U.S. nonfarm payrolls (NFP) will be key drivers. As most market participants return, market liquidity is expected to improve.

2025.01.06

Note: All content in this article is for informational purposes only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.