What Are the Most Popular Strategies Used by Big Players

Financial markets became more active this week due to President Donald Trump’s unconventional approach to geopolitics and the traditional election campaign in Japan.

Trump threatened to launch a new trade war with European allies over his demand that Denmark hand over control of Greenland to the United States, but quickly backed down. In Japan, Prime Minister Sanae Takaichi also stirred markets with an election promise to cut taxes, despite the country’s large public debt and high inflation.

The result: several controversial trades generated quick profits — or losses.

Below is an alphabetical overview of the history, current state, and possible future of some of the most popular market strategies.

‘Basis Trade’

This is a widely used hedge fund strategy that can sometimes lead to severe losses but has drawn increased attention in recent years.

The strategy involves borrowing money — typically in the repo market — and buying or selling bonds while simultaneously taking the opposite position in futures. The goal is to profit from small price discrepancies between the two markets. Supporters argue that it provides an important source of demand for government bonds, especially as debt levels rise across developed markets.

However, the trade is highly risky. Price differences are extremely small, so investment firms use significant leverage to boost returns to meaningful levels. The strategy has been compared to picking up pennies in front of a slow-moving steamroller. Leverage and reliance on short-term funding periodically raise concerns among regulators.

The size of the basis trade is difficult to estimate, and the lack of transparency itself worries policymakers and observers. In January, Morgan Stanley estimated that U.S. basis trading has grown by about 75% since 2019, reaching roughly $1.5 trillion.

‘Bond Steepener’

Long-term bonds are once again worrying investors due to rising government debt worldwide and the likelihood of faster economic growth — and potentially inflation — once the effects of recent central bank rate cuts begin to be felt.

In the U.S., concerns persist about the Federal Reserve’s independence under Trump. This combination has prompted some investors to revive so-called steepener trades — strategies that profit when the yield curve steepens.

This can occur when long-term yields rise faster than short-term yields during a bond selloff, or fall less during a rally.

The strategy has been popular for some time as asset managers moved away from long-dated bonds exposed to fiscal and inflation risks in coming years. Meanwhile, rate cuts support the short end of the curve by lowering yields on shorter-maturity bonds.

The trade gained new momentum this week due to rising geopolitical tensions caused by Trump’s tough stance toward U.S. allies and growing concerns over Japan’s fiscal position. This slowed the debate over whether the strategy has run its course, even as firms such as Pacific Investment Management Co. began trimming positions and taking profits.

The spread between German 2- and 30-year yields widened to its largest since 2019, while the U.S. spread remains near its widest level in four years. In Japan, the equivalent spread reached its highest level since records began in 2006 after bond selling accelerated this week.

Long-term bonds found some relief on Thursday after Trump backed away from tariff threats against Europe, but money managers such as Allspring Global Investments and Fidelity International believe the effect may be short-lived, as market sentiment remains fragile.

‘Carry Trade’

Carry traders borrow in low-interest-rate countries, sell the local currency, and reinvest the proceeds in higher-yielding markets. In theory, exchange rates should adjust over time to reflect interest-rate differentials. In practice, carry strategies can persist for months, years, or even decades, accompanied by broader imbalances in global capital flows.

Because currency volatility fell to multi-year lows last year, carry trades surged. A Bloomberg index tracking the strategy through purchases of eight emerging-market currencies against the dollar delivered returns of about 18%.

That was the highest return since 2009, supported by strong spot gains and high interest rates in Latin America. Because carry profits accumulate gradually through interest differentials — and loans must be repaid in the original currency — sharp exchange-rate moves can quickly erase gains.

Major market disruptions in Japan this week threaten the durability of many carry trades. Many are funded in yen, given Japan’s long history of near-zero rates, and invested in higher-yielding emerging markets. A rapid unwinding of these positions in 2024, triggered by rising Japanese rates, rippled across global markets as investors sold assets to repay yen loans.

Now, with Japanese yields trading near their highest levels since the late 1990s and fears of official intervention to support the currency, the strategy likely offers less potential than last year.

“The yen carry trade is making its presence felt again,” said Joe Mazzola, head of trading and derivatives strategist at Charles Schwab. “Japanese rates and yields are at multi-decade highs, and U.S. risk assets are feeling the impact. The question is how long this lasts.”

‘Debasement’

This strategy appeals to investors worried about rising government budget deficits who move away from government bonds and currencies toward alternative assets such as precious metals.

These assets are seen as better protection against the inflationary effects of government policy and the modern fiat-based financial system, which relies on currencies like the dollar, euro, and yen.

Gold’s strong rally last year was partly driven by this strategy. Central banks — especially in emerging markets — along with asset managers, pension funds, and other large investors have turned to gold to protect wealth from potential “easy money” policies that could erode currency purchasing power.

During this week’s Greenland episode, fears of unpredictable consequences gave the strategy fresh momentum, pushing gold prices to a record $4,915 on Thursday.

Gold is expected to continue benefiting from debasement trades if investors keep diversifying away from U.S. assets.

‘Sell America’

Momentum behind this strategy has fluctuated over the past year. Volatility driven by Trump’s policies is a key factor, as traders reduce exposure to U.S. assets amid rapid policy shifts and sharp rhetoric.

Sentiment was strongest in April — first when Trump announced sweeping tariffs, and again when he threatened to fire Federal Reserve Chair Jerome Powell. In both cases, the S&P 500 suffered heavy losses, and the safe-haven status of U.S. assets was questioned as Treasury bonds also fell.

The strategy resurfaced this week after Trump intensified talks about taking control of Greenland and threatened European allies with new tariffs if they did not support his push to annex the island.

Technology stocks often end up in the crossfire. The U.S. dominates the sector, and the so-called “Magnificent Seven” heavily influence major indices after AI-driven enthusiasm boosted their market capitalizations.

However, as the Greenland episode showed, the “sell America” trade often proves short-lived. One reason is Trump’s tendency to reverse course, leading traders to assume he will abandon his most disruptive proposals. This week was another example: the S&P 500 fell 2.1% on Tuesday but recovered much of the loss after Trump softened his stance.

‘60/40’ Portfolio

The classic 60/40 portfolio — split between stocks and bonds — aims to capture equity gains while bonds provide protection during downturns. Rising stocks and bonds helped the Bloomberg US 60/40 Index gain 13.8% in 2025.

The strategy came under pressure this week as both asset classes weakened simultaneously, briefly pushing January toward its first negative month since April, when Trump’s “Liberation Day” tariffs shook global markets.

Ultimately, the index recovered and is now positive for the month.

“The risk is that if economic data rebound sharply and bond yields rise, markets will stop expecting further rate cuts this year,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “That would increase equity volatility.”

Trump Trades: ‘TACO’ and Big MAC

While some investors “sell America,” others bet on Trump’s inconsistency. The TACO strategy — Trump Always Chickens Out — has proven reliable.

The first year of Trump’s second term followed a clear pattern: he threatens high tariffs, markets fall, then he backs down and markets rebound. This played out in October when Trump threatened 100% tariffs on China and quickly retreated. U.S. stocks had their worst day in six months on the threat, then surged after the reversal. The same pattern repeated this week following the Greenland comments.

One concern is that if aggressive announcements fail to generate enough market panic, Trump may have less incentive to back down.

A related strategy focuses on the November midterm elections and Trump’s efforts to improve his approval ratings ahead of the vote. Known as “Big Midterms Are Coming” or “Big MAC,” it is expected to be a major theme this year, according to Ed Clissold of Ned Davis Research.

These moves are already influencing markets. Under pressure to curb inflation, Trump recently triggered a selloff in financial stocks by calling for credit card rates to be capped at 10%. Defense stocks came under pressure after he demanded companies halt dividends and invest more in production. Shares of Fannie Mae and Freddie Mac fell after proposals to intervene in the mortgage market raised doubts about their release from government control.

‘Widowmaker’ (Japanese Bond Trade)

Shorting Japanese government bonds was long known as the “widowmaker” because it repeatedly burned global investors while the Bank of Japan kept rates near zero. That reputation is now being challenged as Japan’s bond market undergoes one of its sharpest repricings in years.

The strategy has re-emerged due to a combination of factors: the BOJ’s exit from yield-curve control, reduced bond purchases, and Takaichi’s push for tax cuts.

Fears that Japan’s long-term borrowing needs will rise faster than expected have driven yields on super-long Japanese bonds to multi-year highs, sending shockwaves through global markets.

Once synonymous with losses, bets against Japanese bonds have suddenly become profitable — though still highly risky. Inflation is no longer dormant, the BOJ is tightening cautiously, and fiscal discipline is no longer assumed. Yields may now be high enough to attract domestic buyers, potentially limiting further increases. Traders say uncertainty over fiscal policy and the pace of BOJ tightening will likely keep volatility elevated.

-Източник: Bloomberg Terminal