Bank of America Corp.’s macro traders are limiting risk exposure heading into year-end after upheaval in some of the world’s most popular trades. Swings in European interest rates have been particularly vexing for macro funds this year, according to Carlos Fernandez-Aller, co-head of global fixed income, currencies and commodities macro trading at the bank. While emerging-market investors have generally performed better, the deep Brazilian selloff that followed President Luiz Inácio Lula da Silva’s surprise victory has jolted that sector, too, and highlighted how easily rallies can reverse.
“The market is very fragile — any small mishap can cause a continuation of the unwinds that we saw,” said Fernandez-Aller, in an interview at the bank’s New York office. “We are running a relatively small amount of risk.”
In recent weeks, violent political protests in France drove a gauge of French bond risk to the highest since the European debt crisis, while Lula’s reelection triggered the biggest slump in Brazil’s currency in more than two decades on Monday. More broadly, interest-rate markets have been whipsawed by oil’s climb over $110 a barrel, better-than-expected growth and ongoing concerns about swelling government debt loads. Earlier this month, benchmark US yields touched the highest since 2002.
Bank of America’s fixed-income, currencies and commodities trading business — which is split between macro and micro products — saw revenue fall 17% year-on-year in the third quarter, driven primarily by declines in mortgages, municipals and credit. Into year-end, Fernandez-Aller, who co-heads the macro division, is cautious of more market turmoil. He’s keeping an eye on credit spreads, which are flashing risk-off signals amid investor concerns about the AI trade and the massive amount of debt tech companies are taking on to fund their investments.
“One thing I’m following very closely is what happens with credit spreads. That may be the last shoe to drop,” he said. Still, there are some signs that fixed-income market dynamics are shifting, potentially indicating a ceiling on long-dated sovereign bond yields. Treasuries have started to act as a haven again by rallying when equities fall and during periods of heightened political concern in Europe — a dynamic Fernandez-Aller puts down to Federal Reserve Chairman Kevin Warsh reinforcing the central bank’s commitment to tackling inflation.
“We may be entering into the old dynamic of ‘bad news is good news,’ which I have not seen in a few years,” he said, pointing to the prospect of weak economic news spurring market rallies.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing