Commodities | Equities | FX
Given the recent extreme moves in US Treasury yields, the team at PivotalPath analyzed managed futures funds and their exposure to Treasuries to help understand and put into context potential implications.
As you may know, in the span of eight trading days between March 8th and March 17th, 2023, there were massive moves across the US Treasury yield curve including in the US 2-Year Treasury, which rose an unprecedented 2.4% (while the yield fell from 5.0% to 3.8%) – the largest move in a single calendar month going back to 1998, when our data began.
The swift rally across the curve would clearly have a large negative impact on funds that are short Treasuries, including managed futures funds/CTAs. For our analysis, we will use the Bloomberg US Treasury Index, ticker: LUATTRUU, (BUST) as a proxy for Treasury notes and bonds. To better understand the magnitude of exposure to Treasuries, we took a quick look at our correlation screener within our Managed Futures Index (MFI) and sorted the funds by highest (negative) beta as follows:
It has been widely reported that managed futures funds have been positioned short Treasury futures in size, as denoted by the CFTC and referenced in a recent Reuters article here. This is also illustrated by the 18-month rolling beta of MFI to BUST in the following graph:
The MFI has exhibited an increasingly negative exposure to Treasuries since February of 2021. For context, there is only one brief time in history, the fall of 2007, when exposure to BUST has been more negative since our data began in 1998. Additionally, the MFI has not been negatively exposed to BUST since a short stint in 2011 and the summer of 2007 before that.
An OLS (ordinary least squares) regression over the last 18 months yields MFI=-1.27*BUST-1.40% alpha (R2=0.70), in annualized terms. The high R2 indicates a strong linear fit, as evidenced by the scatter plot of monthly returns.
The SG CTA Index, which tracks a smaller universe of managed futures funds on a daily basis, generated a loss of 9% between March 8th and March 17th. This is consistent with expected losses based on the exposure found in our model. For perspective, the loss represents more than 50% of MFI’s gain for all of 2022 and would represent the largest calendar month loss in our data going back to January of 1998.
Lastly, the sharp increase in exposure (in absolute terms) is at odds with the spike in underlying Treasury volatility and the historical relationship between the two.
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