Bond prices have been high on our radar for a while. Back in March, we looked at the relationship between spikes in bond yields and managed futures, pointing out that the recent short-term reversals have not been what the asset class needs. If yields go consistently higher, bonds ought to go lower, and we’ve been waiting for the big bond reversal for some time now. There are several reasons why managed futures would enjoy the trends to be had on the downside in bonds, but we’ve had no choice but to wait patiently for the trend to arrive. Trend followers have been jumping on each little move to the downside in the hope that it represents the start of a new sustained down trend (as rates go up).

Well, nearly two months after our last look, we can say that managed futures were wrong once again on the bond short side (actually, we could have said it in early April). You can see from the chart below that the most recent head fake to the down side is the 4^th to 12^th (depending how big of a down move you consider to be significant) such move to end in a reversal to the upside:

Will managed futures programs learn their lesson and stop trying to go short bonds?  Don’t bet on it.  There may be some managers who tweak their models to ignore the shortside or otherwise slant their programs to the long side in bonds – and investors should view those with a healthy dose of skepticism and worry about such “curve fitting.” If a manager’s trading strategy looks for a big win on the downside in bonds, but the recent slump has made them cautious, they may be falling victim to style drift.

For all others, they are likely not even looking at the failed down trends as failures. The hallmark of a trend following model is taking small but frequent losses in exchange for rare but large gains. So, such programs will keep swinging for the fences on the short bond trade when it comes up, despite their recent strike out and being in a 0 for 20 or so hitting slump since the financial crisis. No matter their recent history, such programs believe the next swing could be the home run – and dare not let one go across the plate without giving it their best swing, hopeful that one day soon they’ll finally get that perfect pitch…