Quantitative funds were to blame for the worst sell-off in Japanese government-backed bonds since 2013, according to a Bloomberg report. The unwinding of long positions in Japanese 10-year bond futures caused a massive sell-off that pointed to funds that focused on quantitative trend-following strategies.
According to the Bloomberg report, “data comprising of open interest positions, fund flow and yields suggest that so-called Commodity Trading Advisors — funds synonymous with trend-following quant strategies — could have been cutting their large long positions in Japanese 10-year bond futures.”
“We see the recent sharp sell-off in JGBs as driven by CTAs’ substantial selling of JGB futures,” said Koichi Sugisaki, a strategist at Morgan Stanley MUFG Securities Co. in Tokyo.
As a result of the sell-offs, yields in the 10-year bonds surged by 12 basis points last week. Furthermore, there could be more sell-offs to come.
“The fact that open interest is still declining meanwhile suggests that CTAs have yet to fully unwind their longs,” said Sugisaki. There is “potential for a wave of further selling in JGB futures, irrespective of valuations, depending on how technical signals pan out.”
Smart Beta Fixed Income Options
The Invesco Multi-Factor Defensive Core Fixed Income ETF (CBOE: IMFD) and the Invesco Multi-Factor Income ETF (CBOE: IMFI) are recent additions to the issuer’s lineup of multi-factor bond ETFs. Both new ETFs track in-house indexes.
IMFI follows the Invesco Multi-Factor Income Index. That benchmark “is designed to provide multi-factor exposure to fixed income securities in the following weights: 25% in mortgage-backed securities, 25% higher-quality US investment grade, 25% high yield, and 25% emerging markets debt,” according to Invesco.
Each of the bond market segments represented in the new ETF has its own criteria for assessing quality and value traits, the factors emphasized by the new ETFs. Last year, Invesco also introduced eight multi-factor bond ETFs that focus on favorable value and quality characteristics.
Smart beta is gaining more traction in the capital markets and in order for that to continue, it will have to be a two-punch combination of lower fees and education that will drive more awareness moving forward.
“There are probably several drivers behind increased adoption, but I think the elephant in the room is lower fees,” said Bernie Nelson, chief research advisor at Style Analytics, in Pensions & Investments. “Most smart beta and factor products are being positioned between traditional active and very low-cost, nondiscretionary passive, in terms of fees as well as active risk. From a fiduciary perspective, there has to be an obligation to examine whether a lower-fee product could provide an appropriate investment solution.”
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