Systematic, trend-following funds have begun to unwind bearish positions in U.S. Treasury futures at pace, according to a new note from Bank of America. The bank says that falling yields this week - which correspond to rising Treasury futures prices - have forced a wave of buy-to-cover activity among CTAs holding short positions, especially in longer-dated contracts.
Treasury positioning
BofA highlights that short positions in 10-year and long-bond Treasury futures have been curtailed as yields dropped further, producing additional demand from systematic buyers. The report notes that shorts at the front end of the yield curve remain sizeable, though those positions are now approaching levels that could also provoke buy-to-cover responses if prices keep moving higher. The bank adds that outside the U.S., CTAs may similarly turn into buyers of German Bund futures as models respond to the trend.
Equity exposure and stop-loss proximity
On the equity side, Bank of America finds that systematic funds have so far sustained large long positions despite recent weakness in stocks. The S&P 500 has recorded a five-session decline that, while meaningful, has not yet forced broad-scale deleveraging by these trend-followers. But the bank calculates that the S&P 500 now sits only about 1.5% above critical CTA sell triggers, trimming the buffer that had previously insulated markets from mechanically driven flows.
The firm warns that if downward price paths persist, CTAs and other systematic strategies could generate additional equity selling over the next week, particularly across U.S. and European markets.
Potential scale of systematic flows
Quantifying the possible impact, BofA estimates that, under a bearish market scenario over the coming week, systematic strategies might sell roughly $86 billion worth of global equities. If markets were to remain flat, these strategies could become net buyers to the tune of about $13 billion; if markets rise, buying pressure is expected to be modest, around $1 billion. Within that framework, CTA strategies constitute the largest share of potential selling pressure.
Commodities and FX trends
The report also points to evolving trends across commodity and currency markets. Gold has declined for four straight weeks, a move that has diminished momentum sufficiently for slower-moving CTAs to start establishing short positions, producing a more bearish consensus among models. Bank of America anticipates potential CTA selling in soybeans and aluminum as well.
In foreign exchange, the bank expects trend-following programs to buy the U.S. dollar against the British pound, Australian dollar, Canadian dollar and Mexican peso in the coming week, reflecting recent trend signals in those crosses.
Leveraged ETF flows in memory stocks
Separately, BofA flags that assets in leveraged and inverse ETFs tied to memory-chip stocks continue to expand. Within the firm’s universe of these funds, products linked to Micron remain the largest by assets, while ETFs associated with SanDisk have climbed to second place, overtaking funds linked to Nvidia and Tesla. The bank cautions that rankings of assets under management among leveraged ETFs can shift quickly if memory-stock prices pull back, given the sensitivity of such products to market moves.
What the report leaves clear
BofA’s note outlines several intersecting dynamics: tactical covering in long-dated Treasuries as yields fall, persistent equity long exposure that is increasingly close to systematic stop levels, the potential for notable global equity disposals under a bearish scenario, and evolving CTA positioning in commodities and FX. The report underscores the speed with which trend-following strategies can alter market flows when key price levels are breached.