Exactly a week ago, we asked whether CTAs were helping to fuel the bond rally that drove 10Y yields below 2.02% ahead of a weekend that, by some accounts anyway, was set to include the annihilation of the state of Florida by a Day-After-Tomorrow-ish hurricane and an ICBM launch by North Korea.
You’ll recall that in weeks following Sintra, CTAs suffered through their worst stretch since 2007 (at least according to a couple of widely-followed indices) as DM bond yields exploded higher after what’s come to be known as Draghi’s “hiccup” moment, in which the ECB boss suggested he was willing to look through purportedly transitory weakness in inflation on the way to normalizing policy.
Fast forward to last week and as Deutsche Bank’s Steven Zeng noted, “the CTA performance index ripped in the back half of August after 10s rallied below 2.25%.”
DB’s rolling 1m beta analysis showed CTAs getting long – “bigly.”
So that chart is from a client note out last week and in a new piece dated Thursday, Deutsche observed the following:
It appears that CTAs are also in the consensus long Treasury and short USD trades. CTAs beta to Treasuries has grown to near 3 year highs following strong performance over the past quarter, this is also the largest net exposure that we measured for CTAs. The other position that CTAs seem to have added to is the short USD, which reached its lowest level since Jan-15 earlier this week. The multiple regression isolates the impact of each asset class from each other, meaning that it is not just the USD effects that are causing the impacts on equities, Treasuries, or commodities.
Well given that, it’s fair to ask if maybe the CTA crowd had a bad week. Because long Treasurys and short USD wasn’t exactly how one would have wanted to be positioned ahead of the “no apocalypse” risk rally that saw 10Y yields rip 18bps higher off the previous Friday’s lows while the dollar put in one of its best five-day stretches of 2017.
Sure enough, “CTA funds gave back 40% of their gains since August in last week’s Treasury selloff,” the above-mentioned Steven Zeng writes, in a new client note, before adding that “CTAs remain considerably long and are in flatteners.”
So again, the question here would seem to be the same as it was last week. Namely, what happens if Treasurys continue to sell off and this position has to be unwound?