CTAs have dramatically increased their long fixed income positions over the last quarter according to the latest Weekly Brief from Lyxor’s Cross Asset team, and the company is concerned about the impact a bond trend reversal might have on their performance going forward.

Lyxor writes: “In parallel, investors’ love for the US Dollar remains intact, despite the softer stance adopted by the Federal Reserve and the recent loss of momentum of the Dollar index. Available data from the CFTC, which incorporates both institutional investors (including pension funds, endowments, insurance companies, and mutual funds) and leveraged funds (typically hedge funds), suggests the long US dollar trade is well alive. CFTC data is lagged due to the recent government shutdown. Yet, our proprietary data on CTA exposures suggest such strategies have reinforced their long positioning on the US currency since mid-January, especially against European currencies such as the Euro, the British Pound and the Swiss Franc. In the Global Macro space, the views are more contrasted and, if anything, the long positioning on the US currency is less aggressive now compared to what it was last quarter. 
 
“Overall, mounting European challenges, such as growth deceleration and looming Brexit deadlines have translated into a higher aversion towards the common currency globally. At the end of last week, Benoît Coeuré, an executive board member of the ECB, sent dovish monetary signals which may reinforce investors’ long US dollar bias. Our view on the EURUSD stays neutral but as discussed above, we maintain our underweight stance on European bonds since we believe the fixed income rally in Europe is becoming very stretched.”