Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


CTAs Rally As Treasury Yields Reach Multi-Year Highs

08 Oct 2018

Investment Partners

Strong macro numbers in the U.S. have lately reignited fears of a bond market correction. Treasury yields rallied at the long end of the curve, with the 10-year reaching a record high since 2011, at 3.2%, while 2-year yields stand currently at a decade high. The steepening of the yield curve sent shockwaves across equity markets, fueling a sector rotation in favor of financials and value stocks. Concurrently, oil prices rallied, in a context where crude supply disruptions and geopolitical risks have raised concerns over the tightness of the oil market. Our views on fixed income have been defensive for some time, but we are now warming up on short dated Treasuries considering the carry and the protection it provides against rising yields.

In the hedge fund space, CTAs made the most of such market movements. Their short positions on U.S. Treasuries and long positions on crude oil were highly rewarding. Meanwhile, their higher allocations to U.S. assets in FX and equities also helped on the back of the US Dollar appreciation and the resilience of U.S. stocks in relative terms. On a negative note, Event-Driven and L/S Equity strategies continued to underperform last week. The former was impacted negatively by the Akorn vs. Frenesius deal break in the health care sector. On October 1st, Akorn’s stock price crashed (-58.7% in a single day), after a court ruling   allowed Germany’s Frenesius to walk away from its US Dollar 4.75bn takeover of Akorn. With regards to L/S Equity strategies, their underperformance is mainly related to adverse market developments at a time when their market beta was higher, along with unfavorable sector rotations.

In terms of investment recommendations, we upgraded the stance on CTAs to Overweight over the course of September and remain constructive going forward. The strategy currently protects against multiple sources of risks such as geopolitics with long crude oil positions; Brexit with short GBPUSD; Italy’s sovereign concerns with very limited exposures to European equities; EM turmoil with long US Dollar positions. Finally, the short stance on Treasuries and preference for U.S. stocks is aligned with our views on traditional asset classes. CTAs are thus a very good portfolio diversifier at the moment. We believe the strategy should be able to outperform going forward, after a difficult start to the year.

Strong macro numbers in the U.S. have lately reignited fears of a bond market correction.


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