Nomura’s McElligott: ‘Carry Mania’ Is Back As Central Bank Vol. Suppression Returns ‘With A Vengeance’

Make “shoots” green again!

Or something.

“Global growth ‘green shoots’ are suddenly a ‘thing’ again following yesterday’s China- (Manu PMIs) and US- data (ISM, Retail Sales revisions HIGHER and Construction Spending), which appropriately then dictated a good ol’ fashioned ‘positioning rinse’ across a portion of the enormous ‘Length’ we have recently highlighted in USTs / Duration / Rates”, Nomura’s Charlie McElligott writes on Tuesday, recapping Monday’s action which found global equities in “big league” rally mode and USTs squarely on the back foot as 10-year yields rose nearly 10bps.

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Fun factoid: Monday was the worst day for TLT since “long way from neutral”.


McElligott delivers a series of additional highlights from Monday’s “cleanse.” For example, he notes that “the US Long Bond future experienced its 4th worst day of the past 1Y period at -2SD”. He also points out the “massive re-pricing in the front-end” as EMD9EDM0 moves from the “max inversion of -42bps on March 27th to yesterday’s max steepening to -26bps.”

Given the ferocity of the move, Charlie says clients naturally beat down his digital door asking whether systematic flows were at work. “We (not surprisingly) received a TON of inquiries on whether the violent selling / ‘Bear Steepening’ of US Rates was originating out of the ‘short term’ Systematic Trend universe”, he writes, before noting that if you ask his QIS CTA model, the answer is actually “NO” (all caps in the original, as usual).

You’ll recall that McElligott has talked quite a bit about the “Max Long” in bonds witnessed across both his CTA and risk parity models. As far as the former goes, we’re still “bigly in-trend”, as it were. Here’s Charlie:

The “Max Long” in both UST 10Y and ED$ positions for CTAs remains, as the position is deeply “in the money” with strong price trend and still low trailing realized volatility signal (in aggregate across all of our model time horizons), with deleveraging levels in both still “away” from triggering as per current levels.


And as for the risk parity model, Charlie says it’s still at ~2.5 standard deviations:


(Bloomberg, Nomura)

From a sector/factor/thematic perspective, McElligott warns that “green shoots” could pose a risk if they end up endangering the return to the consensus slow-flation plays in a world where the post-crisis paradigm is back en vogue.

“As the ‘Slow-Flation’ mindset has returned in earnest this year (leading to popular ‘risk barbell’ positioning: Long Secular Growth and Long Quality / Defensives / Bond Proxies vs Short Cyclicals / Value), any SUSTAINED, and thus, ‘meaningful’ re-pricing HIGHER of Growth or Inflation Expectations could then become a driver of underperformance for consensual US Eq positioning”, he cautions, adding that on Monday, “US Equities saw a significant thematic shift” thanks the good growth vibes emanating from the Chinese data and the ISM beat stateside. “[The] ‘Value’ factor exploded higher thanks to leadership from US Cyclicals and the significant macro catalyst of ‘Bear Steepening’ in US Rates Curves”, Charlie writes.



Panning out to a 30,000-foot view, McElligott notes that we’re back in central bank “vol. suppression” mode, as policymakers implicitly underwrite and otherwise ensure the viability of the “Carry Is King” mantra. To wit:

Cross-asset vols were again smashed yesterday, with Rates “carry” folks re-engaging into the recent jump in realized, while within Equities we saw fundamental funds “rolling-out” options which in turn pressured short-dated vol, while too systematic sellers remained active. It all comes down to the renewed “Carry is King” worldview in-light of Central Banks being scared of their own shadows and in max “vol suppression” mode.


That (i.e., central bank vol. suppression and all that comes with it) will apparently be the dominant market mode again until such a time as enough people are willing to go against the “swarm” by betting on policy impotence. At that point (assuming we ever get there), it will be time for policymakers to dive even further down the rabbit hole and reach even further into bottomless hats in search of magic bunnies lest everyone should all at once get the idea that the emperors really don’t have any clothes.

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