CTAs and the treasuries reversal: time to pay attention?

One thing I have learned over time is the best thing to do is let market price action guide your decision-making and then try to understand the fundamentals as they become more evident and comprehensible.”

Paul Tudor Jones, “The Great Monetary Inflation” – May, 2020

Institutions like Nomura, JPMorgan, Rabobank and others watch CTA hedge funds’ activities quite closely because, as Nomura’s analysts found, “understanding CTA strategies “can provide a strong edge in today’s highly systematized markets.” 

CTA stands for Commodities Trading Advisor, but these funds’ importance is not related to commodity trading but to the fact that most CTAs use systematic trend following strategies and because they collectively move some $300 billion in assets (plus leverage). At times these funds act in concert and their trade flows can trigger major moves in equities, treasury futures and commodities. Rabobank analysts concluded that “CTAs have long been key in understanding price action in commodities.“

Last week Nomura reported that CTA selling again pressured the US treasury prices. And again, with TrendCompass reports you had those signals in the real time: over the recent weeks, I-System strategies gradually reduced long positions and reversed to net short on the following dates:

• US 10-year Note: net short as of 21 Oct 2020
• US 30-year Bond: net short as of 1 Oct 2020
• German Bund: net short as of 28 Aug 2020

This cold be significant since the prices of US Treasuries are the most important prices in all of global markets. Aside from being the world’s largest market, the price of US debt instruments affect the US dollar, which has a strong impact on commodity markets. Recall, over the last 20 years, oil prices have had an 80% inverse correlation with the US dollar index.

In this sense, trend following strategies provide an invaluable early warning for major market tremors that could be just ahead of us. At present, I-System strategies suggest that your exposure in our Major Markets portfolio should be as follows:

I-System, the AI engine generating TrendCompass report has faithfully generated trend-following signals for over 20 years now, keeping our clients on the right side of all the major market moves, virtually without exception. Below is the graphic summary of the way I-System navigated this year’s oil price roller-coaster. This event has caused severe losses to many market players including at least 25 American oil and gas corporations that have since filed for bankruptcy.:

And here’s how I-System handled COMEX Copper:

Extreme price events such as these have been more frequent and more severe since the last financial crisis and we are likely to see many more of such moves in the future. Being on the right side of those events can make all the difference for investors, traders and hedgers alike. Having that guidance is as simple as subscribing to daily TrendCompass reports. The first month is free of charge!