Cross Asset Systematic Highlights Full Steam Ahead: Trend-Following in Credit Markets

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Cross Asset Systematic Highlights Full Steam Ahead: Trend-Following in Credit Markets

um. If bond yields were going down due to

growth risk, that would not be a hopeful message for stocks. But in this case, both sides

of the stock vs bond risk premium have been improving. In the case of stocks, we have

had restrained multiples and strong earnings growth, whereas for bonds, we have falling

yields thanks to the worst case scenarios for geopolitics and inflation being curtailed. So

from the perspective of our risk premia by pairs approach: in the numerator is stock

yield minus real bond yield, and in the denominator is the stock vs bond risk difference.

Every part of this has improved (stocks via earnings, bonds via inflation, and cross asset

risk environment calming) giving the upper end of the k a rationale to stay long risk

assets for longer. It is of course a hopeful and delicate moment, with Hormuz daily

vessel crossings jumping from close to zero in recent months to a high of 25, still well

off more normal readings in the 60’s. As usual with our risk premia by pairs philosophy,

we can be happy with a mediocre risk premia compensation with a mild risk

environment, and this tradeoffs can change dramatically with any new flareup of

tensions.

One of the key ideas of our work is to try different alpha sources & signals and see

whether they agree or disagree. For instance, in our market dislocations dashboard, we

would like to see that the opinion of valuations (via PCA), positioning and momentum

are sending the same message (or two out of three). At the strategy level, we highlight

the tremendous benefit mean-reversion strategies provided for trend-following in 2025,

as trend-following struggled with the ‘Taco’ trade of April’s Liberation Day. So as we