‘They’re Still Extremely Leveraged’: ‘Crowded Unwind’ By CTAs Could Exacerbate A Rates Selloff

Right, so we know CTAs had a really shitty couple of weeks following the hawkish procession that followed Mario Draghi’s June 27 comments in Sintra, Portugal.

The coordinated hawkish lean from DM central bankers triggered a global mini-tantrum in DM rates and that fucked the trend followers (well that, and some misplaced commodities bets). As BofAML noted earlier this week, the average CTA suffered a 5-sigma drawdown:

Don’t go thinking that went unnoticed by central banks.

While the average retail investor (those would be the people who think they became gurus in 2009 and steadfastly refuse to connect the dots between the onset of active management underperformance and the start of QE) doesn’t know what the fuck a CTA is, it likely wasn’t lost on policymakers that they were on the verge of tipping a few programmatic/systematic dominos.

And so, Janet Yellen had to “correct” the situation with a dovish lean on Capitol Hill.

“The CTA community got some much needed reprieve from the rally, with the rates market taking a breather from the selloff this week as Treasuries richened about 6 bps and the 2s10s curve flattened back to around 97 bps post the June CPI release,” Deutsche Bank wrote on Friday evening.

“However, a large beta of CTA returns to the Bloomberg Treasuries Index suggests that CTA positions are still extremely leveraged,” the bank’s Steven Zeng goes on to warn, adding that “the risk is skewed toward a more sustained rise in rates trigger[ing] a crowded unwind by the CTAs, which could accelerate the selloff.”

The bottom line here seems to be that they’re still sitting on to their longs (against which they’ve probably bought some insurance).

But a sharp break higher in rates could very well make them rush to the exits in earnest.

So in short: we’re gonna need more dovish leans.