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Best Trades for Macro Views

How do you choose the best trade for implementing a given macroeconomic view, such as a change in the rate of economic growth, inflation or expectations about Federal Reserve policy? The Global Fixed Income and Foreign Exchange Strategy team at JPMorgan Securities ranked dozens of trades across liquid asset classes by their sensitivity to macro forces and discovered the best tactical trades are often the simplest ones.

Best trades for views on growth, inflation, Fed

For all implementing views on growth, inflation or Fed expectations, five instruments proved to be generating the highest risk-adjusted returns:

  • Eurodollar futures
  • Two-year U.S. Treasury Notes
  • 5s/30s curve
  • Swap spreads
  • Commodity futures

The trades tested were buys (or a steepener in the case of the curve trade) when growth expectations fall, inflation expectations fall, and the Fed is expected to lower rates and sells (or flattener on the curve trade) when the consensus expectations were an increase in each area.

Best trades for views on growth, inflation, Fed

For investors with a view on growth, the best trades were two-year U.S. Treasury notes, Eurodollar futures, the U.S. 5s/30s curve, EUR/USD, USD/CHF, swap spreads, BBB credit, EMBI, S&P vs. U.S. Treasuries and industrial metals. Cross-market government spread trades, outright equity positions and precious metals were less efficient for trading on growth expectations.

For investors with a view on inflation, the best trades were swap spreads, two-year U.S. Treasury notes, Eurodollar futures, 10-year U.S. Treasury notes, S&P outright, industrial metals and energy futures. Credit, S&P vs. U.S. Treasuries, cross-market government spreads and foreign exchange were less efficient means of positioning.

For investors with a view on Fed policy, the best trades are two-year U.S. Treasury notes, Eurodollar futures, the U.S. 5s/30s curve, swap spreads, the 10-year U.S. Treasury note and industrial metals. Equities, credit and foreign exchange are comparatively worse markets in which to position.

Consult your financial advisor if you want to discuss ideas like this further.