Treasury-selling pressure likely over, says JPMorgan

Bloomberg

Fast-money investors have their fingerprints all over last month’s Treasury selloff — and that may be good news for bulls hoping for a reprieve.
Commodity trading advisers, who use a momentum-driven investing style, flipped from neutral to a short position in the 10-year US Treasury futures contract on April 18, helping to send the note itself racing to 3 percent along the way, according to JPMorgan Chase & Co.
The switcheroo was particularly sharp and, along with hedge funds, drove bearish sentiment in the world’s largest bond market, research from the bank suggests. Even if CTAs remain notably short, it also suggests their ability to exacerbate moves in the underlying Treasury market may have diminished.
“Momentum traders are less likely to remain as a strong bearish force for 10y USTs going forward,” strategists led by Nikolaos Panigirtzoglou wrote in an April 27 note. CTA positioning is hard to figure out, as systematic traders follow a wide variety of signals that differ from fund to fund. JPMorgan uses a proprietary model to capture CTA exposures based on short- and long-term trends, as well as a mean-reversion signal that assumes strategies will flip to neutral when momentum looks extreme. The upshot? The threat posed by CTAs to Treasuries has now largely subsided. They could help enrich Treasury prices going forward “if the momentum signal begins to turn neutral again in the absence of another catalyst to push yields higher,” conclude the JPMorgan strategists.
For all the bearish missives issued by bond investors this year about the threat from rising US interest rates to faster economic growth, the bank calculates that some of the biggest active mutual funds in the US, in aggregate, remain decidedly long. That buttresses the notion that shifts in fast-money positions have had an outsized role in driving Treasury prices over the past two weeks, according to the US bank.