Are CTAs Behind The Bond Rally?

Well, anyone who was frustrated with 10Y yields closing in on a 1 handle is likely a little less irritated on Monday.

The broad risk-on move now has yields up some 7bps on 10s, although in the grand scheme of things, 2.12 and change probably isn’t what everyone had in mind in January when “short USTs” was supposed to be a “no-brainer” trade.

USTs

As noted earlier, there’s an increasingly vociferous debate going on right now about whether the rally in bonds has run too far or whether fiscal uncertainty emanating from D.C., subdued inflation, uncertainty around how aggressive the Fed can realistically be in December considering the meeting will likely coincide with a new round of political wrangling, and the looming threat from North Korea which can send investors fleeing to havens with the punch of a button, justifies lower yields.

One thing worth noting as you think about this is that in the week through last Tuesday, spec positioning moved back into net short territory.

UST1

“Flows during the week of 8/30-9/5 were bearish across the curve, with a total net selling of 10.9mm DV01 [and] there was significant reduction in spec TY long positions of nearly 5mm DV01, or about 22% of the week-ago positions,” Deutsche Bank writes, in a client note making the rounds. Notably, “the overall net selling in DV01 was the largest since May”:

UST2

So who’s helping the rally along? Well, one plausible answer is CTAs. “The CTA performance index has ripped in the back half of August after 10s rallied below 2.25%,” Deutsche goes on to write, adding that their “rolling 1m beta analysis shows that CTAs have gotten very long the market”:

CTAs

Given that, one can’t help but wonder if we’re about to see a repeat of the rates mini-tantrum that unfolded following Sintra, when CTAs were reportedly caught wrong-footed.

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