CTAs To Turn Short Treasuries As Crowded "Everything Duration" Unwind Accelerates

Since Fed Chair Powell dropped his dovish 'not hiking until inflation explodes' comments at last week's press conference, the long-end of the US Treasury curve has seen a massive round-trip.

Initially tumbling 20bps on the lower-for-longer-er comments, the last few days have seen that unwind entirely as trade optimism dominated sentiment.

Source: Bloomberg

Nomura's MD of Cross-Asset Strategy, Charlie McElligott, notes that investors who had herded into "Long Worst Case Scenario, Short Good News' positions are being hit with unwind-y flows, as the latest FT report that the US is set to drop or reduce tariffs ahead of the Phase 1 signing escalates the Global DM Bond selloff / bear-steepening.

The equity market is indeed pricing in a China trade deal...

Source: Bloomberg

McElligot further details that:

Global DM Bonds remain offered with curves continuing to (bear) steepen, as a number of tactical “reversal catalysts” have converged to lean-into the 2019 “Everything Duration” trade and caused knock-ons across thematic cross-asset “trend trades.”

For example...

Source: Bloomberg

Our much-discussed CTA model’s anticipation of pending SIGNAL “FLIP” TO SHORT (will go -29%) in both TY- and ED$- (ED4) positions remains firmly “in-place” and set to turn tomorrow, on account of the majority-loaded 3m window (now 64.7% weighted) turning outright “Short” and overriding the 1Y window, which not surprisingly remains “long” / trend-intact.



Further, McElligott notes that the flurry of heavy issuance this week across USTs, EGBs and US Corp IG is indeed piling-onto this dynamic, with yesterday seeing $11.825B from 10 issuers US High Grade alone and dealers estimating upwards of $95B of Corp IG paper across the month of November.

There too are central bank catalysts in the form of the ongoing BOJ efforts to steepen the JGB curve, as well as increasing “Fed Pause” narrative shift away from the heavily positioned “Fed cutting to Zero in a year” crowd

And finally, as noted above, the general “risk-ON” as the thematic dynamic I’ve been pointing towards as an “asymmetric positioning risk” plays-out.

Notably, any powerful blast of US yield curve bear-steepening typically spells pain for US Equities “Momentum” factor, which in-turn has meant broad “fundamental” manager performance pain - and that’s exactly what happened.

And if the momentum collapse relative to value is anything to go by, things could get a lot worse for "everything duration" holders...

Source: Bloomberg

Key point here from McElligott:

JUST LIKE this past September’s “Momentum Massacre” - is that this is a “crowding” issue is amongst FUNDAMENTAL managers and NOT a “QUANT” phenomenon (as many “blame” it to be) per se, as “pure” sector-TILTED “1Y Price Momentum” factor is -6.2% (proxy for fundamental manager crowding into the “Everything Duration” trade) over the past four sessions alone, underperforming the sector-NEUTRAL “1Y Momentum” factor (-4.4%) by a whopping 180bps over that short window.

In-fact, “QUANTS” have largely benefitted from this recent “Value” over “Growth” / “Min Vol” phenomenon since the start of September’s bond sell-off began, as “Value” remains a core tenet of traditional risk-premia multi-factor models.

For now, McElligott suggests the melt-up takes the S&P to 3100 - due to options strike weights...

But given the massive delta/gamma, what happens after that could be significant - and timed with a potential planned signing (or not) of a US-China trade deal.

Nomura Quant Strategy:

"The market's expectations for a US-China trade agreement are becoming stronger with each passing day, and many investors seem to have come to the conclusion that they have no choice but to take on more risk"

Source: Bloomberg

Bloomberg notes that for some, the bond declines bear a resemblance to the market “tantrum” of 2015, when German borrowing costs soared after the European Central Bank indicated it wouldn’t cut rates further. Back then, the sell-off in bunds saw German rates soar from as low as 0.05% to around 1.06% in less than two months.

“It is starting to smell a bit like the sell-off in the spring of 2015, but it is actually easier to put some factors behind it this time,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S.

“Pricing is no longer for lower rates and momentum has shifted.”

Source: Bloomberg

The moves so far aren’t that extreme, but some market observers have suggested there are echoes. This time around, the Federal Reserve has played a similar role to the 2015-vintage ECB, signaling that it is taking a pause, while Australia’s central bank held rates Tuesday and Sweden’s Riksbank is determined to hike by the end of the year.

So, is it a breakout, or fake-out?