Summary
Bank of America’s research team says active benchmark funds are keeping short positions to manage duration exposure and have simultaneously been raising allocations to mortgage-backed securities (MBS) and investment grade (IG) bonds in recent weeks. Data from the Commodity Futures Trading Commission indicate asset managers expanded their short holdings last week, a trend echoed by some slower-moving trend-following strategies.
Positioning and profitability
According to Bank of America’s systematic strategies desk, short positions across the Treasury curve remain in profitable territory. Long exposures - particularly those positioned further out along the yield curve - face the prospect of being closed out because they are generally unprofitable, with the notable exception of positions tied to 10-year notes, which maintain relative profitability.
The bank’s futures-positioning proxy signals a selloff bias across most tenors. While shorts are broadly profitable across the curve, long positions are largely losing money except at the back end where 10-year note longs show better standing.
Flows, holdings and investor behavior
Bank of America notes that foreign official investors may step in to buy when prices fall, but other investor groups are largely remaining on the sidelines. Overall fund inflows rose last week, yet flows remain lighter at the front end of the curve.
U.S. Treasury holdings at the bank are higher year-to-date but have slid by roughly $30 billion from a peak reached at the end of March. Milliman data cited by the bank suggest even well-funded pension plans are not engaging in significant derisking activity.
Systematic strategies and trend followers
The bank’s systematic strategies team observes that slower trend followers have added to short positions, and that longer-term trend-following strategies are likely continuing to add shorts in U.S. Treasuries.
Implications
The net picture described by Bank of America is one of persistent short-duration positioning and a tilt into MBS and investment-grade credit, with profits on shorts across most tenors and selective profitability for 10-year exposures.