AlphaSimplex Group, led by Kathryn Kaminski, has closed out a more than two-year short bet against US bonds, marking a significant shift as the market emerges from one of its most challenging periods in decades. Kaminski revealed in a Bloomberg Television interview on Thursday that their model has generated long trend signals, describing it as an “epic” signal for the market. This move comes after maintaining a short position for nine quarters, making it one of the longest shorts in trend-following history over the last two to four decades.
The reversal follows a strong rally in bonds during the last two months of 2023, driven by increasing bets that the Federal Reserve will begin cutting interest rates amid a slowdown in inflation and economic growth. The rally helped Treasuries recover from deep losses in 2021 and 2022 when inflation surged, and the Fed pursued aggressive monetary policy tightening.
Kaminski emphasized the importance of this shift, indicating the end of the tightening cycle and suggesting a regime change. She expressed the need to focus on the next phase of the bond market, anticipating a steeper yield curve. The catalyst for this shift is under consideration as part of the next phase of the market.
AlphaSimplex’s public mutual fund, the Virtus AlphaSimplex Managed Futures Strategy Fund, delivered a strong return of about 36% in 2022 as the bond market declined. However, it experienced a 10% loss in 2023 after the late-year rebound. AlphaSimplex was acquired by Virtus Investment Partners Inc. last year.
While recent gains have driven 10-year Treasury yields to just under 4%, Kaminski noted that the strength of the buy signals in the firm’s models is currently somewhat muted. The outlook for continued gains will depend on whether the market has overestimated the extent of the Fed’s rate cuts this year.
Kaminski urged caution, stating, “We need to watch what’s happening with the supply of Treasuries to look at the end of the curve and what’s happening there as we try to navigate this year. This is going to be the year to watch the shape of the curve.”
Thursday saw Treasury yields rise after robust jobs data raised doubts about the timing and depth of the Fed’s policy easing, leading swaps traders to trim their rate-cut bets. Technology stocks faced a decline, and the US dollar appreciated.
Kaminski highlighted the market’s inflection point, noting the shift toward longer signals in various asset classes, particularly equities. She also pointed out strong short signals in the US dollar, signaling a dissipation of the inflation trade observed for the past two years and a movement toward a new trend in the market.
