Systematic Rates Trading and Correlation Across G10 Markets : Using Time-Lagged Signals as a Proxy for CTA-Driven Trends in Fixed Income Securities

This study examines the influence that systematic momentum traders, particularly Commodity Trading Advisors (CTAs) have on government bond yields across G10 rates markets with differing liquidity levels. Managed futures accounts are gaining interest and increasingly serve as a prominent component of diversified institutional portfolios on the back of historical outperformance during periods of market turmoil. Consequently, their role in financial markets is growing more pronounced. The research includes four of the G10 currencies, namely USD, EUR, SEK and NOK, to assess whether there exists a difference between any given impact based on liquidity in the respective underlying markets. The research quantifies the extent to which CTAs affect yields on government issued fixed income securities on a weekly basis. This is operationalized by utilizing the most commonly traded and liquid swap rates in each market as proxies for government bond yields and employing a weighted multiple regression-based empirical model, with a continuous time-lagged signal based on the underlying time series, serving as a proxy for CTA momentum trading. The empirical findings reveal a statistically significant relationship between the time-lagged signals and the spreads across all given combinations of swap rates over the five-year sample period. Consequently, the null hypothesis stating that there is no statistically significant relationship between the weekly changes in cross country swap rate differences and the time lagged simple moving average crossover can be rejected at the 5% significance level. The ex-post direction of the spread varies as the empirical results showed statistical significance both for widening and tightening differences between cross country swap rates. These findings both provide consistency and challenging nuances to the Efficient Market Hypothesis (EMH), as the regression results are partly at odds with the strict interpretation of EMH. Although the data suggest that information from historical price trends significantly correlates with subsequent price action, the fact that the regression coefficient estimates for the independent variables vary in sign across models indicates that directional predictive power is not uniform.