Commodity trading advisors (CTAs) and systematic trend-following funds are building shorts in equities at the same time they remain sellers of U.S. Treasurys, according to an analysis by Bank of America. The bank's models indicate a divergence in behavior between faster and slower trend-following strategies, a split that has already been apparent in recent market moves.
Faster models are short, slower models sitting closer to neutral
BofA's framework shows "faster CTA models are already leaning short equities," while the slower-moving trend-followers have not yet rotated significantly and are closer to neutral. That asymmetry has produced less synchronized selling across systematic strategies, but the bank cautions that the neutral stance among slower models may not hold for long.
Analysts led by Chintan Kotecha wrote: "Absent a clear recovery in equity prices, slower signals can deteriorate quickly, and within roughly the next week we could see a more material turn toward net short equity exposure." The firm flagged time as a potential catalyst that could allow slower signals to catch up with faster ones, producing a larger collective move into short positions.
Rates selling persists and is broadening
Trend followers continue to sell U.S. Treasury futures, driving yields higher. The 10-year yield has climbed to its highest level since July, and selling has extended across the curve. BofA highlighted that risk-management triggers are "starting to bite across the 5y-30y complex," creating scope for additional short positioning if selling pressure in rates persists.
Outside the U.S., CTAs are adding to short positions in German Bunds. In foreign exchange, the bank's models point to further selling pressure on the euro and the British pound. Emerging market signals are weakening as well, with some managers likely exiting longs in the Mexican peso after recent downside triggers.
Commodities: gold falls, oil supports performance
In commodities, a sharp weekly drop in gold has likely resulted in the unwinding of long gold positions that were accumulated over the prior year, though BofA notes trend signals for the metal remain elevated and are still "some distance from outright shorts." Losses in gold have partially been offset by gains in oil, where long exposures continue to support performance. The bank cautioned that oil-related gains could reverse if prices fall more sharply.
Potential scope for sizable systematic selling
BofA's broader positioning estimates suggest systematic funds are biased toward selling in the near term. The bank assesses that such strategies could sell up to $73 billion in a down market over the coming week, with projected flows turning negative across most scenarios. That dynamic reinforces the risk of continued downward pressure on equities if trend-following models align.
Key takeaways:
- Faster CTA models are already short equities, while slower models remain nearer to neutral but could flip within roughly a week.
- Trend-followers are continuing to sell U.S. Treasury futures, pushing yields higher and creating stress across the 5y-30y portion of the curve.
- Positioning extends beyond U.S. markets - CTAs are adding short Bunds, selling the euro and pound, and trimming some emerging market currency longs such as Mexican peso exposure.
Risks and uncertainties:
- Slower trend signals may deteriorate quickly if equities do not recover - this could magnify selling across systematic funds and increase pressure on equity markets.
- Continued selling of Treasury futures may lift yields further and trigger additional risk-management selling across the 5y-30y curve, affecting bond market liquidity and valuations.
- Commodity and FX exposures remain vulnerable - gold longs appear unwound after a sharp weekly drop, and oil positions that are currently supportive could reverse if prices fall materially.
BofA's observations underscore a market environment in which trend-following strategies are contributing to selling across multiple asset classes. The timing of a potential alignment between faster and slower models is a key variable for near-term market direction, with the bank warning that a failure of equities to stabilize could prompt a rapid intensification of net short exposures.