Quant Funds Dump Treasuries Positions Adding to Selloff

(Bloomberg) -- Quantitative hedge funds are being partly blamed for the biggest selloff in Treasuries in seven months.

Funds known as Commodity Trading Advisors -- synonymous with trend-following quant strategies -- have likely been actively shedding large long positions in 10-year bond futures, according to market watchers. These systematic accounts tend to be secretive with their strategies, leaving a puzzle for analysts to estimate positioning.

The large volumes traded in futures after the 10-year Treasury yields broke above 0.69% this week suggested an unwind of CTA long positioning, Citigroup Inc. strategists Bill O'Donnell and Ed Acton wrote in a note. CTAs have been long for all of 2020, and a break above this level could see a potential $80 billion in positions washed out, they said.

Improving sentiment as lockdown measures ease and data improves has buoyed yields. The U.S. 10-year has jumped 20 basis points this week, poised for its biggest increase since November.

As key levels are breached, it can kick-start sell flows from these funds.

CTAs have been overweight bonds and appear to be unwinding long positions in 10-year Treasury futures, according to cross-asset strategist Masanari Takada of Nomura Holdings Inc. He sees this as profit-taking so far, and expects a trigger line around 0.84%.

The 10-year yield rose three basis points to 0.86% on Friday.

With a wash-out underway in 10-year futures, attention is turning to where else positioning may be stretched and looking vulnerable.

Eurodollar futures - used to bet on the outlook for the dollar Libor gauge - are showing a “100% long” position, Charlie McElligott a strategist at Nomura Securities said in separate emailed comments.

Taking the generic fourth Eurodollar future at 99.76, a 10-tick move lower would start to trigger “very large selling to reduce to long exposure,” he said.