Momentum Quants are 100% Short on the Money Markets All Around The World.
Right on cue, Wall Street quants that chase trends across assets have just gone for maximum bearish in global money markets as inflation angst fuels their best year since 2014.
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With yields approaching and price pressures breaking out, the Nomura Holdings Inc. is now 100% short on everything from zero to British pound rates in the $340 billion complex of commodities trading advisors.
These systematic investors are also building outsized short positions across the entire yield curve, according to Dynamic Beta Investments. The firm that runs an ETF mimics a CTA says such exposures are particularly acute on US Treasury notes in 10 year terms.
Now the question is whether the most credible inflation threat in more than a decade will reward such bearish positioning going forward.
It takes time for the market to fully price the hawkishness, says Steeve Brument, head of quant multi-asset strategies at Candriam, a New York Life Investments unit which runs a trend fund. That it takes time to assimilate new information is actually what's creating trends, so there might be more opportunities in rates. A rally in long-term Treasuries flattened the yield curve on Wednesday after the U.S. reported the fastest inflation in three years since 2008 - a sign investors are starting to price in slower economic growth amid earlier rate increases
The global front-end is scrambling to put forward timing on potential hikes, thus adding risk premium as central banks are forced to play catch up and put the genie back in the bottle, Charlie McElligott, cross-asset strategist at Nomura, wrote in a Wednesday note. The fixed interest rate is getting pretty crowded again. With the Treasuries falling over the last seven weeks, commodities set for their best year since 1979 and the greenback rising against all but three major currencies in the past month, CTAs find plenty of opportunities to ride the inflation hoopla.
In addition to U.S. debt, Nomura has calculated CTAs are short bonds across Europe and Japan from Britain and Australia as central banks post Federal Reserve also start signaling intentions to pare pandemic stimulus.
Towards 2021, the Societe Generale SA index of CTAs has extended its gain to 8.8% - - set for its best performance in seven years.
CTAs dissect price patterns and trade a range of cross-asset futures. Given their investing strategies and models differ, returns this year among the larger players vary Aspect Capital's enhanced trend fund is up 11%, while Transtrend's DTP Enhanced Risk surged 25%. The AQR Managed Futures Strategy Fund gained 2% and the Man AHL Alpha Fund increased nearly 6%.
With positioning now firmly bearish, the outlook has become a little murkier. At JPMorgan Chase Co. flows guru Nikolaos Panigirtzoglou reckons U.K. and German bonds at this point are almost oversold, which might prompt some momentum traders to take profits.
Regardless, signs the low-rate era may endure look like a boon for momentum quants who have struggled to ride inflation prices in the inflationary era.
Today interest rates are still pretty low, said Brument. If one day a central bank needed to aggressively fight inflation, that would be bad for markets but a good opportunity for CTAs. Can Jane Fraser Remake Citigroup?
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