Did Some Macro Fund Get Carried Out Today?

While we were digging into the details of today’s apparent risk-parity fund puke (with bonds and stocks both clubbed like baby seals), something odd jumped out at us.

From the open of the cash markets today, bonds and stocks were both sold hard – something we have not seen in recent weeks, and certainly not at the size and consistency of today…

Source: Bloomberg

While there is some reason to believe that pure technicals could have driven the move in bond yields – as machines pushed to run stops above the pre-plunge levels from Friday – the move was still shocking amid a 5%-plus collapse in stocks…

Source: Bloomberg

However, what really stood out was that while bond yields were surging, Bond ETF TLT’s collapse was accelerating far beyond its underlying. This decoupling between ETF and underlying has happened at the end of every day this week, but today’s was extremely noticeable with TLT crashing into the close so much that it would have implied 25bps more decompression in the 30Y yield…

Source: Bloomberg

A little more digging shows a high volume almost constant selling pressure in TLT that began each day around 1430ET – exactly when margin calls tend to hit. As you can see Monday was really ugly (stocks were down hard), Tuesday was ugly but a little more controlled (Tuesday was big stock market up day), and then today was a bloodbath (with stocks also crashing)…

So the question is – how would a fun get forced to liquidate its long-bond ETF, given that if it had been long to start with it would have had a massive profit cushion as TLT has been unstoppable this year…

Source: Bloomberg

So what happened? It would appear some macro fund was perhaps ‘barbelled’ as they like say – long high growth stocks, long bonds as a hedge – and while the gains in bonds had been considerable, they were nothing relative to the (likely levered) losses that any higher growth exposure has suffered in such a high velocity manner…

Source: Bloomberg

Leaving us to suspect that the unusual surge in yields of the last three days, and consequent crash in TLT, was driven by the forced liquidation of an entire fund (or at the least an entire strategy) as the margin calls on the equity side losses forced the sale of bonds in order to come up with some liquidity to meet broker limits.

Is it over? Hard to say – but judging by the selling-climax and decoupling in TLT today, we suggest yes and now bonds will return to their ‘normal’ correlation pattern with stocks.