A Bank of America model shows that shorts in intermediate- and long-term US Treasuries have been substantially covered, while S&P 500 futures are only about 0.5% from the first CTA sell trigger. Over the coming week, systematic strategies could net sell 48 billion US dollars of global equities even if markets are flat.
Original source：BofA Global ResearchFirst published on Unhidea：Original source date：
Key takeaway
Falling Treasury yields and stock prices are driving CTAs to reduce positions across assets, while weakening equity-index trends mean potential systematic selling grows as markets fall.
How far has Treasury short covering progressed?
As US Treasury yields and equities fell together, CTA short covering this week spread from intermediate maturities to the long end, also driving a reduction in cross-asset positions. Bank of America said futures on Treasuries with maturities of 10 years and longer had crossed all of its risk-management thresholds, but shorts in 2-year and 5-year Treasuries may still be covered.
Volatility at the short end is lower, and Bank of America estimates that short positions there may have been larger at their peak than the long-end positions that have been unwound. However, Treasury futures trends remain at their most negative across all observation windows, and CTAs are still far from switching to long positions. German government bonds show a similar pattern: 10-year and 30-year shorts may have been covered, while some remain at the short end.
How close are equities to systematic selling?
After another difficult week for technology stocks, CTA equity positions continued to shrink. S&P 500 futures were the only equity market covered in the report where positions remained consistently long across model horizons and risk tolerances; the first sell trigger was only about 0.5% from the level at the time.
Bank of America's model estimates the level at which S&P 500 futures longs begin to unwind at 7623 points. The bank expects trends in most equity markets to weaken over the coming week; if realized volatility rises, CTAs still holding long positions may also reduce them.
According to Bank of America's combined estimates for CTA, risk-parity and volatility-control strategies, they could net sell 79 billion, 48 billion and 1 billion US dollars, respectively, over the coming week if global equities fall, remain flat or rise. The estimates assume assets of 300 billion, 200 billion and 200 billion US dollars for the three types of strategy, respectively; actual strategies differ in their rules and trading times, affecting how concentrated the selling is.
How might options and ETFs affect equity-index volatility?
As of the close on 22 October, S&P 500 options hedgers' gamma was 3.3 billion US dollars, at the 41th percentile over the past year and below the median for the first time since 16 September. Although the S&P fell 1.21% on Thursday and the VIX approached 20, five-day intraday realized volatility as of 23 October was still 11.2%, at the 36th percentile over the past year.
To maintain their daily targets, leveraged and inverse ETFs buy when markets rise and sell when they fall. Bank of America estimates that for every 1% move in the S&P 500 and Nasdaq 100, respectively, related US-listed ETFs need to trade approximately 1.1 billion and 2.6 billion US dollars in the same direction; these amounts respectively equal 3% and 22% of the average notional trading volume in the relevant futures and ETFs during the final five minutes before the close over the past month.
What else has changed in currency and commodity positions?
The US dollar fell against the Canadian dollar for a seventh consecutive day on Friday, and most CTA short positions in the Canadian dollar triggered stop-loss covering this week; Bank of America expects further Canadian-dollar strength could bring more covering. Euro shorts have become the most crowded foreign-exchange position, with the nearest covering trigger still more than 1% away.
In commodities, a downward trend in gold could prompt CTAs to increase shorts, while crude-oil long positions remain crowded; copper stop-loss levels are approaching, particularly for London Metal Exchange copper futures. After the initial unwinding of longs in soybean-related instruments, selling could also continue into the following week.
