March 14, 2023
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So anyone watching CNBC or picking up the WSJ has heard of Silicon Valley Bank by now. The failed startup bank which caused the Fed to step in and sort of guarantee deposits across all regional banks. But while all that real world, actual customers and their bank deposits stuff were going on – here in the derivatives world there was chaos in bond markets. Chaos?
Yeah, the biggest 2 day move EVER in 2-year notes, and everyone from 5yrs to 30yrs following suit.
The logic? That the bank issues was the sign the Fed needed to stop hiking rates and indeed perhaps bringing cuts back into play. The problem for trend followers.. they were short across the bond complex. A quick look at the SocGen Trend Indicator shows us trend short most every bond market – which aligns with the clear down trend on the charts above to start 2023.
That second column above is the days in the position, which holds some interesting nuggets. The 2yr has been a straight-down machine, as evidenced by more than 500 days in the trade. But the other US bonds are relatively newer trades, just teenagers so to speak. That generally means they are at the highest risk point for that trade. And that shows in the performance of the public funds we track and follow in the space, where it was a lot of red.
Now, a few on this list, like Standpoint’s BLNDX (@StandpointFunds) with 50% long equity exposure or the top Catalyst/Warrington program (@CatalystMF) with 50% bonds – outperformed based on those total portfolio structures. But elsewhere, the story was – the more bond exposure you had, the more you lost. The longer term you are, the more you lost. The less reactive you are on an hourly or even daily basis, the more you lost. Not necessarily wrong or bad – just is what it is. Those tilts sure helped the last two years.
Many of these were likely stopped out of their shorts, reduced positions based on the volatility, or even reversed long. Indeed, that is what likely caused a great deal of the buying pressure. We’ll see what happens next – but consider trend followers very de-risked in the bond space for the foreseeable future as those large up moves work their way through their models and risk systems.
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