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“CTA Selling Of Bonds Has Gotten So Relentless It Looks A Little Unnatural”


Yesterday, when looking at the latest CTA positioning, we said that “CTAs Are The Most Short Treasurys Since 2018… And Getting Shorter” warning that we could see a massive flush if and when the 10Y broke above 1.50%. Well, one look at the 5Y future today and it looks like we were right.


Making matter worse, the CME today reported that its Ultra 10-Year Note and 30-Year Bond futures broke volume records on Feb. 23, as the U.S. Treasuries rout paused before resuming the next two days, meaning that real money is now also aggressively selling rates.


So in an attempt to assess what may happen next – which as we said earlier may required full-blown Fed intervention shoudl the selloff accelerate…

The Fed really needs to make an announcement here. What is going on in TSYs is not normal

— zerohedge (@zerohedge) February 25, 2021

… we give the mic to the man who originally warned that the 1.50% level would be catalytic for the market – Nomura quant Masanari Takada – who today confirms that “selling of global government bond futures by trend-following CTAs has rightfully been cited as one cause of the steep rise in yields” adding that “CTAs’ aggregate net short position in major government bond futures markets is now at the 85th percentile based on the data since 2009, which is further to the short side than CTAs have been since 2018.” While this is not really news, and was first flagged by JPM two days ago, it is still a remarkable testament to how ugly things can get very quickly once momentum reverses.


As Takada then observes “the momentum behind systematic bear trades in bond futures is looking increasingly difficult to rein in” and ominously notes that “CTAs’ selling of bond futures has gotten so relentless as to look a little unnatural. Why would this be?”

One possibility he lists is that fundamentals-oriented investors have started selling bonds at the same time. Global macro hedge funds, for example, have gone back to accumulating short positions in UST futures after a spell of short covering last week. One wonders whether Fed Chair Jerome Powell said something in his congressional testimony that set them off, the Nomura quant wonders. 

Another possibility is that the behavior of global macro hedge funds is also being replicated on a larger scale among fundamentals-focused long-term investors. These investors have probably found more motivation to sell USTs since the 10yr yield climbed past 1.30%. The tendency for price action to be more dramatic when USTs are falling offers one hint that this is the case.

In any case, Tokida concludes that “whatever the underlying forces, the balance of supply and demand among major players in the UST market is tilted far enough to the selling side that it has become difficult to ignore the possibility of a rise in the 10yr UST yield to above 1.5%.” Of course, with yields having soared to 1.60% after the 7Y auction this is now in the history books, which is also why Takeda cautions that “the US equity market, no longer able to endure the strain of rising yields, could lose its composure at that point.”

And that’s precisely what is happening…