If you’re searching for the quintessential manifestation of the macro-policy about-face behind November’s “everything rally” (and who isn’t, right?) look no further than the managed futures universe.

Earlier this month, I mentioned that the abrupt November reversal across the US rates complex led to a sharp drawdown for CTAs, where legacy positioning was obviously short (into the inflation shock, bond rout and Fed hiking campaign).

Fast forward a few weeks and the scope of the legacy trend trade unwind is well worth another mention — it’s the “perfect proxy,” as Nomura’s Charlie McElligott put it Monday, for how the multi-faceted regime change witnessed since October is “knocking into positioning reversals and stop-outs.”

As noted in the linked article above, the current CTA drawdown is the second of 2023. The first came in March, when a multi-sigma dovish repricing catalyzed by a trio of US bank failures upset the proverbial apple cart for “go with it” hawkish rates bets.

The annotations in the chart are McElligott’s. The “‘tail’ of two drawdowns” quip is clever.

Charlie noted that October’s FCI messaging shift (i.e., when Fed officials began to telegraph an inclination to skip the final rate hike tipped by the September dot plot in light of the back-up in long-end US yields) along with a “meaningful” moderation in the incoming data, together prompted “partial or total” unwinds for legacy shorts in bonds, STIRS and equities, and also for dollar longs.

As the table shows, those unwinds were “of substantial notional size,” as McElligott put it.

One key piece of nuance almost totally lost in the CTA bond short unwind discussion this month was the distinction between signals. As Charlie noted Monday, the one-year window for legacy bond and STIR shorts is still deep in-the-money.

“[The] pain points from here within the CTA space” are still around those legacy shorts, Charlie went on, flagging more “potential buy-to-cover flow ” in the event the rally extends say, on the back of additional macro softness in the US, or “a global growth scare.”