The Zhitong Finance App learned that as the European bond market is turbulent, Brazilian financial assets are being sold off on a large scale, and credit risks caused by the artificial intelligence (AI) investment boom continue to heat up, macro traders under Bank of America (BAC.US) are taking the initiative to reduce risk exposure to further market fluctuations that may occur before the end of the year.
Carlos Fernandez-Aller, co-head of global fixed income, foreign exchange and commodity macro trading at Bank of America, said that many popular global trading strategies have been hit one after another this year, and market vulnerability has clearly increased. Even small-scale accidents may trigger a new round of centralized liquidation of positions. “The market is very fragile, and any minor accident may cause the wave of liquidation we have seen before to continue to spread.” “We currently have a relatively small risk exposure,” Fernandez-Aller said in an interview at Bank of America's New York office.
European interest rates fluctuate sharply and Brazil's assets plummet, impacting emerging market transactions
Fernandez-Aller pointed out that the sharp fluctuations in the European interest rate market this year posed a particularly serious challenge to global macro-funds. Recently, fierce political protests broke out in France, heightening investors' concerns about the country's financial and political prospects, and pushing the index for measuring the risk of French treasury bonds to the highest level since the European debt crisis.
At the same time, Brazil's financial market has also been severely impacted. After Brazilian President Luiz Inácio Lula da Silva (Luiz Inácio Lula da Silva) unexpectedly won re-election, investors' concerns about the country's future fiscal policy and economic prospects quickly heated up, leading to a concentrated sell-off of Brazilian assets.
On Monday, the Brazilian currency recorded its biggest one-day decline in more than 20 years, causing the previous relatively good emerging market trading strategy to also be hit hard.
Fernandez-Aller believes that the drastic adjustment in the Brazilian market highlights that even assets that have continued to rise and perform strongly until now may quickly reverse once market expectations change.
More broadly, the global interest rate market is being impacted by multiple factors, including international oil prices rising above $110 per barrel, better-than-expected economic growth performance, and continued expansion in the debt burdens of governments.
Together, these factors are driving large swings in global bond yields. Earlier this month, the yield on the US benchmark treasury bond rose to its highest level since 2002. In this context, interest rate and exchange rate transactions, which were originally favored by macro funds, faced greater uncertainty, forcing traders to reassess their risk tolerance.
Bank of America wary of widening credit spreads: it may become the next risk flashpoint
Looking ahead to the end of the year, Fernandez-Aller said he is particularly concerned about changes in the global credit market. As investors' concerns about AI investment prospects and large-scale debt financing for technology companies have intensified, global credit spreads have recently widened markedly, sending a signal that market risk appetite is declining.
Major technology companies are raising huge sums of money through the bond market to build data centers, procure AI chips, and expand computing power infrastructure. Although related investments have boosted the rapid development of the AI industry, the scale of corporate debt continues to rise, which has also raised market concerns about future cash flow, return on investment, and solvency.
Fernandez-Aller warned that the credit market could be a key source of risk for the next round of financial market turmoil. “One thing I'm keeping a close eye on is how credit spreads will change in the future. This is probably the last boot that falls.”
Credit spreads usually refer to the difference between the yield on corporate bonds and the yield on government bonds over the same period. Widening interest spreads often mean investors are demanding higher risk compensation, which also reflects rising market concerns about corporate credit risk.
If credit spreads continue to widen, corporate financing costs may rise further and put pressure on stocks, bonds, and other risky assets.
Notably, Bank of America's own fixed income trading business is also affected by changes in the market environment. The bank's revenue from fixed income, foreign exchange and commodities (FICC) transactions fell 17% year over year in the third quarter, mainly hampered by the decline in revenue from mortgage-related products, municipal bonds and credit transactions.
The safe-haven properties of US bonds are once again showing long-term treasury bond yields or are close to the top
Despite the multiple risks faced by the global market, Fernandez-Aller also observed that there are some noteworthy changes in the trading logic of the bond market.
One important sign is that US Treasury bonds are beginning to re-show the characteristics of traditional safe-haven assets. Recently, when US stocks fall or European political risks heat up, the price of US Treasury bonds often rises and yields fall back, indicating that investors are once again viewing US bonds as a safe-haven tool during times of market turmoil.
This change contrasts with the market's performance in the previous period. In the past few years, against the backdrop of high inflation, increased government debt, and rising global bond yields, US bonds have not always provided effective protection when risky assets fall.
Fernandez-Aller believes that the renewed safe-haven nature of US debt is related to Federal Reserve Chairman Walsh's continued emphasis on the central bank's commitment to controlling inflation. He pointed out that this change may mean that long-term sovereign bond yields are gradually approaching the top.
He said that the market may be returning to a long-lost trading model, that is, negative news such as weak economic data will no longer necessarily trigger asset sell-off; on the contrary, it may cause investors to bet on a shift in monetary policy towards easing, thus driving the market up. “We may be returning to this environment where 'bad news instead drives the market up'. I haven't seen this situation in the past few years.”
If this trading logic redominates, it means that market concerns about uncontrolled inflation and continued interest rate hikes may ease, and slowing economic growth may once again become an important factor affecting asset prices.
However, Fernandez-Aller remains cautious about the market outlook until the end of the year. He believes that while European political risks, emerging market fluctuations, and AI-related credit concerns have not subsided, the global financial market may still face a new round of shocks.