(Bloomberg) -- There’s more trouble ahead for the short-dollar trade.
So says David Riley, chief investment strategist at BlueBay Asset Management LLP, an alternative debt manager with $60 billion. In April, he snapped up euro-dollar currency options to insulate local emerging-market investments from a rally in the greenback that he says may have more life yet.
“There is potential for a bit of a short squeeze and a pain trade in dollars and we want to protect ourselves from that,” Riley said in an interview. “It makes more sense in some of our multi-asset credit portfolios to hedge some of that exposure we have via EM.”
Emerging markets have suffered as resurgent U.S. inflation expectations and Europe’s easing growth momentum fed dollar gains. The Bloomberg Dollar Spot Index has increased 3.1 percent since April 16, though speculative positioning remains notably bearish.
Investors who gobbled up developing-economy assets this year often did so unhedged, effectively banking on continued dollar weakness. Carry-trade returns from eight emerging markets, funded by short positions in the U.S. currency, turned negative for the year last week, according to one Bloomberg index.
Still, there’s some solace for emerging markets. The London-based investor sees the Treasury selloff stalling, for now, with the 10-year yield retreating from 3 percent notched last week. In April, Riley exited a short position on U.S. interest-rate futures established in October and turned neutral -- in discord with record bets against 10-year Treasury contracts. Subdued trend inflation and a Federal Reserve lacking hawkish zeal should support bond prices, according to Riley.
“We don’t think we’re going to get those signals until the June meeting,” he said. “At the moment, it pays to be on the sidelines even though we think over the next two years Treasury yields will move higher.”
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