JPMorgan Says Quants' Treasury-Selling Pressure Likely Over

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(Bloomberg) -- Fast-money investors have their fingerprints all over last month’s Treasury selloff -- and that may be good news for bulls hoping for a reprieve.

Commodity trading advisers, who use a momentum-driven investing style, flipped from neutral to a short position in the 10-year U.S. Treasury futures contract on April 18, helping to send the note itself racing to 3 percent along the way, according to JPMorgan Chase & Co.

The switcheroo was particularly sharp and, along with hedge funds, drove bearish sentiment in the world’s largest bond market, research from the bank suggests. Even if CTAs remain notably short, it also suggests their ability to exacerbate moves in the underlying Treasury market may have diminished.

"Momentum traders are less likely to remain as a strong bearish force for 10y USTs going forward," strategists led by Nikolaos Panigirtzoglou wrote in an April 27 note.

CTA positioning is hard to figure out, as systematic traders follow a wide variety of signals that differ from fund to fund. JPMorgan uses a proprietary model to capture CTA exposures based on short- and long-term trends, as well as a mean-reversion signal that assumes strategies will flip to neutral when momentum looks extreme.

The upshot? The threat posed by CTAs to Treasuries has now largely subsided. They could help enrich Treasury prices going forward “if the momentum signal begins to turn neutral again in the absence of another catalyst to push yields higher,” conclude the JPMorgan strategists.

Position pendulum

For all the bearish missives issued by bond investors this year about the threat from rising U.S. interest rates to faster economic growth, the bank calculates that some of the biggest active mutual funds in the U.S., in aggregate, remain decidedly long. That buttresses the notion that shifts in fast-money positions have had an outsized role in driving Treasury prices over the past two weeks, according to the U.S. bank.

Data from Credit Suisse Group AG also suggest a notable shift in trades. CTA and macro hedge funds pushed their rate exposure to the most bullish in nearly five years in late March, before reversing course, according to the lender’s prime brokerage arm.

Still, that’s not to say shorting Treasuries has spurred bumper returns. Drifting markets without clear trends -- from volatile equities to a resurgent dollar and commodity prices -- have resulted in range-bound performance for the investing style over the past month.

The Societe Generale SA CTA index, which captures returns from 20 funds open to new investments, is little changed since the end of February.

With the Treasury selloff stalling, Citigroup Inc. strategists are bullish, eyeing a rally that takes the 10-year to 2.65 percent. Yields have declined about 7 basis points since hitting 3 percent last week.

As for systematic investors, based on trading activity in futures indicated by open-interest data, CTAs would be "forced" to cover positions en masse once the note trades between 2.82 percent and 2.86 percent, according to Andrew Brenner, the head of international fixed-income at Natalliance Securities in New York.

©2018 Bloomberg L.P.

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