Markets have seen yet another tumultuous week as the Trump tariff saga continues. By Wednesday, April 9, major sell-off fears spread to US treasuries—often deemed the world’s safest and most liquid asset—forcing the US President to walk back some of his tariff agenda and announce a 90-day pause on a long list of “reciprocal tariffs”, except those affecting China, the minimum 10% tariff baseline for all countries and a variety of other sectoral tariffs.
Trader TV speaks to Miguel Cota, head of fixed income trading for Global Trading at American Century Investments about the events of last week, the volatility in fixed income, and the contagion risk across all global markets.
There is no playbook for this says Cota. “This source of volatility is new, something we haven’t seen before”
The head of trading walks through his teams approach to trading in these kinds of conditions; how it differ per asset class, their voice Vs electronic breakdown, and what informs their decision-making.
Finally, Cota poses the big question we are all looking for answers to. Find out what that is in this episode.
Interview
Jo Gallagher We’ve had so much whiplash from tariff announcements and we saw a major sell-off in US Treasuries. Walk us through the effects of last week on bond markets.
Miguel Cota What you saw was tariff announcements led to uncertainty. This raised investor concerns around growth and inflation. And essentially, you had investors rush to the exits. This obviously caused heightened volatility and it persisted for over a week, made for a fairly challenging trading environment. Liquidity was tough across all sectors within fixed income. The weakness first started within equity, spread to corporate credit, went into government bonds, and then you kind of saw that in munis in pretty violent moves in this space. In investment credit, we saw outflows of $9.8 billion, which was the highest since COVID. High yields saw outflows of $11.5 billion, which is the highest I think on record since 2010. But what was really interesting to us is when we were coming in on Tuesday, the long bond had moved 20 basis points wider overnight. And there was chatter about what the drivers were on the street. It was unwinding of the basis trade, foreign investors and lack of confidence in the US. And to a lesser extent, there was talk of treasuries being used as a source of cash to be margin calls or fund outflows.
It didn’t really matter what the drivers were. The desk was thinking like, well, what’s the contagion? What’s next to get hit? And then just shortly after, we saw munis, nothing but sales and BWICs (bids wanted in competition), a record level of BWICs, 2.6 billion on Monday, 2 point 6 billion on Tuesday, over 3 billion, I think, on Wednesday. And it just kept piling on. Then come midday Wednesday.. I know where you get the temporary policy reversal with the 90-day pause on tariff implementation. I think what was most interesting to us was the source of this volatility is new, something we haven’t seen before. it’s different and less understood. If you take, for instance, Silicon Valley Bank’s collapse in 2023, that source of volatility was well understood. In fact, there was already a playbook and a solution for it, whereas what we’re seeing today is something that we haven’t seen in 100 years. In fact it was a very different world than we’re in today, more of a, I’d say, complex global economic system.
Jo Gallagher And so how do you trade in these chaotic conditions?
Miguel Cota I think to answer that is really dependent on the asset class. Take corporate credit, for instance. In a normal environment, you’re going to go through some pre-trade analytics, take some cost estimates that are model-based. You’re framing your liquidity, framing your price, making a decision around order prioritization, and then you make a decision on whether or not you’re gonna go voice, you’re you’re go electronic. In chaotic markets that we’re seeing today, a lot of that goes out the window. Things are changing way too rapidly. In this instance, what you end up seeing is kind of more of a transition from, say, electronic for us to, you know, direct engagement, so more voice trading. Whereas in say treasuries, for instance, in what we’re trying to achieve, it’s still okay to be electronic, the vast majority of our trades there being electronic. And then with munis, it is wherever you can find liquidity. But more similar to credit in where you’re moving away a little bit from the electronic side of things and more voice and old-school protocol.
What we do tend to look at to help us is this real-time information. We’re looking at gages of recession risk and whatnot. We’ll look at the VIX. We’ll looking at long-dated equity vol. We’ll get implied volatility in say HYG. We’ll we look at premiums and discounts in the different ETFs and the different asset classes that we’re trading to help get a good understanding of where risk is being transferred and what does it cost to trade that risk.
Jo Gallagher And so what piece of advice would you offer traders for the week ahead?
Miguel Cota I think it’s a difficult question to answer, but I think what I would advise is definitely stick to your process, being disciplined about that, right? You want to respond and not react to things, but being in your seats is going to be pretty important, right, because at any moment you can have a headline that needs to be digested quickly and the decision needs to made quickly. What needs to front of mind for everyone is that this is just a 90-day pause in the tariff policy. It’s temporary. So the big question is, what happens in 90 days?
Jo Gallagher Thank you Miguel for your insight, of course you’re watching, this has been Trader TV This Week.
Catch the show each week:
To watch other Trader TV This Week shows go to – Video
Or make sure to follow us on LinkedIn – Trader TV’s LinkedIn
Available as a podcast – link
