The market for U.S. Treasury securities is the single largest market in the world. It sets the interest rates on American government debt which is the most important price in the global markets. While the recent Treasury price fluctuations might have lulled many a trader to sleep, today’s signal on 30-year T-Bond futures should snap them back to alertness.

Tracking a set of CTA strategies, this morning we had a fairly strong reversal in exposure, from 50% net short to 33% net long:

To be sure, CTA systematic trend following strategies predict nothing; they only react to price fluctuations as they unfold. But one of the reasons why today’s signal could be significant is that a whole category of investment funds, the CTAs (Commodity Trading Advisors) tend to rely on similar strategies to gauge their market positioning and have often catalyzed major market moves in the recent past. Accordingly, many institutions like Nomura, JPMorgan, and Rabobank watch CTA activities very closely.

As Nomura’s analysts found, “understanding CTA strategies “can provide a strong edge in today’s highly systematized markets.” These funds collectively move some $300 billion in assets (plus leverage) and when they act in concert their trade flows can trigger major moves in equities, treasury futures and commodities. Rabobank analysts hold that “CTAs have long been key in understanding price action in commodities.“ With that in mind, today’s signal could be significant.

US 30-year Bond futures usually lead

Of course, we don’t know what will happen, but one thing that’s characteristic of the US 30-year T-Bond futures is that historically, they have tended to change direction quite strongly and in sharp moves, which is why our strategies on the 30-year Bond react much more sensitively than those tracking shorter-dated treasuries which tend to move with more inertia. 

For traders, it’s important to execute on these signals as they happen, rather than waiting to see… The trade could prove wrong, but by the time we see the moves unfold, most of the price rally could be already behind us. Making peace with the hard fact that about 50% of all our trades will prove “wrong” is simply part of our reality where speculation and risk management come head-to-head with uncertainty.

Last July, we saw a similar situation that’s taken bond traders by surprise, resulting in multi-billion losses for many pedigreed funds. The episode was in fact quite remarkable and I put together an article and a short video analyzing the experience:

We never expect any surprises!

The advantage of CTA strategies is that trend followers are never taken by surprise. It’s not that we have a better ‘crystal ball’ to divine the future; rather, we simply adhere to a pre-defined quantitative set of rules and don’t wait for an intellectually compelling explanation for what’s going on in the markets.

As the English proverb says, we can’t predict the winds, but we can adjust our sails. That proverb perfectly captures the difference between trend followers and fundamentals analysts: as trend followers, we are constantly adjusting our sails; the fundamentals analysts exert themselves trying to predict the winds. Some, like Paul Tudor Jones learned the wisdom of keeping his sails adjusted through experience:

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

Alex Krainer – @NakedHedgie is a former hedge fund manager, founder of KRAINER ANALYTICS and publisher of the daily TrendCompass reports. I-System TrendCompass provides daily CTA signals on over 200 financial and commodities markets so you can navigate trends profitably, with confidence and peace of mind. Subscription rates start at below 85 Eur/month (1,000 Eur/yr) and one-month test drive is always free of charge. To learn more, please visit TrendCompass page or drop us an e-mail at TrendCompass@ISystem-TF.com. For qualified investors, we can also propose superbly engineered turn-key portfolio solutions, including a high-octane inflation hedging portfolios.

The books are now free: since Amazon has recently banned all of my books, including the award-winning “Mastering Uncertainty in Commodities Trading,” they are now available for free at this link.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s