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Investing.com -- Lower rates are driving systematic investors to rotate into U.S. Treasuries and out of the dollar, according to Bank of America.
The bank said the decline in yields following Chair Jerome Powell’s dovish Jackson Hole speech has reinforced trend-following demand for Treasuries.
“In fixed income, the pace of trend follower UST futures buying is increasing on this week’s move lower in rates,” BofA analysts led by Chintan Kotecha wrote.
They noted that 10-year positioning is getting longer across models, while 30-year positioning remains mixed as medium- and long-term accounts cover shorts.
The moves come as the U.S. dollar weakened for a third consecutive week. BofA said trend followers could add to euro, sterling and yen longs in the days ahead.
“CTAs could be buyers of EUR, GBP, and JPY in the days to come,” the analysts said.
Meanwhile, outside the U.S., the bank expects selling pressure in Bunds and Chinese government bonds next week.
In commodities, systematic strategies are shifting into agricultural markets while trimming exposure to energy and metals.
BofA highlighted that “the whole soybean complex moved higher again” last week, and it believes that trend followers “will continue covering Soybean and Soybean Meal shorts.”
On the other hand, CTAs are likely to sell oil and copper futures in the near term.
Gold positioning remains stretched in longer-term trend-following accounts after recent gains.
Equity exposure among trend followers was little changed, with positions still “stretched long S&P 500, Nasdaq 100, and Nikkei 225 futures.”
At the same time, smaller longs in the Russell 2000 and Euro Stoxx 50 suggest limited moves are expected in those indices unless volatility rises, according to BofA.