Popular global trades are being hit one after another! BofA macro traders cut risk exposure before year-end, warning that the credit market may be the next risk flashpoint.

Title context: Popular global trades are being hit one after another! BofA macro traders cut risk exposure before year-end, warning that the credit market may be the next risk flashpoint. Text: With turbulence in the European bond market, a large-scale selloff in Brazilian financial assets, and rising credit risks stemming from the artificial intelligence (AI) investment boom, macro traders at Bank of America Corp (BAC.US) are proactively reducing risk exposure to cope with further market volatility that may emerge before year-end. Carlos Fernandez-Aller, co-head of global fixed income, currencies and commodities macro trading at Bank of America Corp, said that multiple popular global trading strategies have been hit in succession this year, market fragility has risen markedly, and even a relatively small surprise could trigger a new round of concentrated unwinding. "The market is very fragile, and any small surprise could cause the wave of unwinding we saw earlier to continue spreading," Fernandez-Aller said in an interview at Bank of America Corp's New York office. "The risk exposure we are currently carrying is relatively small." Sharp swings in European rates, Brazil asset slump hit emerging-market trades Fernandez-Aller pointed out that the sharp volatility in the European rates market this year has posed a particularly severe challenge to global macro funds. Recently, intense political protests broke out in France, intensifying investor concerns about the country's fiscal and political outlook and pushing a gauge measuring French government bond risk to its highest level since the European debt crisis. Meanwhile, Brazil's financial market has also been severely hit. After Brazilian President Luiz Incio Lula da Silva unexpectedly won re-election, investor concerns about the country's future fiscal policy and economic outlook quickly intensified, leading to a concentrated selloff in Brazilian assets. On Monday of this week, the Brazilian currency recorded its largest one-day decline in more than 20 years, dealing a heavy blow as well to emerging-market trading strategies that had previously performed relatively well. Fernandez-Aller believes that the sharp adjustment in the Brazilian market highlights that even assets that had previously risen steadily and performed strongly can reverse rapidly once market expectations change. More broadly, global rates markets are being hit by multiple factors, including international oil prices rising above US$110 per barrel, stronger-than-expected economic growth, and persistently swelling government debt burdens across countries. These factors have combined to drive sharp swings in global bond yields. Earlier this month, the US benchmark Treasury yield once rose to its highest level since 2002. Against this backdrop, rates and foreign-exchange trades that had been favored by macro funds face greater uncertainty, forcing traders to reassess their risk tolerance. BofA wary of credit spread widening: may become the next risk flashpoint Looking toward year-end, Fernandez-Aller said he is particularly watching changes in global credit markets. As investor concerns intensify over the outlook for AI investment and large-scale debt financing by technology companies, global credit spreads have widened markedly recently, sending a signal of declining market risk appetite. Large technology companies are raising huge amounts of funds through the bond market to build data centers, procure AI chips and expand computing infrastructure. Although related investment has driven the rapid development of the AI industry, the continued rise in corporate debt has also raised concerns about future cash flow, investment returns and debt-servicing capacity. Fernandez-Aller warned that the credit market may become the key source of risk for the next round of financial market turmoil. "One thing I am watching very closely is how credit spreads will change next. This could be the last shoe to drop." Credit spreads usually refer to the difference between corporate bond yields and government bond yields of the same maturity. A widening spread often means investors are demanding higher risk compensation and 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 equities, bonds and other risk assets. It is worth noting that Bank of America Corp's own fixed-income trading business has also been affected by changes in the market environment. The bank's third-quarter fixed income, currencies and commodities (FICC) trading revenue fell 17% year on year, mainly dragged down by declines in revenue from mortgage-related products, municipal bonds and credit trading. US Treasuries' safe-haven appeal re-emerges; long-term Treasury yields may be near a peak Despite the multiple risks facing global markets, Fernandez-Aller also observed that some noteworthy changes are emerging in the trading logic of the bond market. One important signal is that US Treasuries are beginning to show the characteristics of a traditional safe-haven asset again. Recently, when US stocks fell or European political risks intensified, US Treasury prices often rose and yields fell, showing that investors are once again treating Treasuries as a hedging tool during periods of market turmoil. This change contrasts with market performance over a period of time previously. In the past few years, against the backdrop of high inflation, rising government debt and higher global bond yields, Treasuries have not always provided effective protection when risk assets fell. Fernandez-Aller believes that the renewed strengthening of Treasuries' safe-haven appeal is related to Federal Reserve Chair Warsh'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 a peak. He said the market may be returning to a long-absent trading pattern in which negative news such as weak economic data no longer necessarily triggers asset selloffs but may instead prompt investors to bet on a shift toward easier monetary policy, thereby pushing the market higher. "We may be returning to this environment where 'bad news actually drives the market higher,' something I have not seen in the past few years." If this trading logic regains dominance, it would mean that market fears of runaway inflation and continued rate hikes may ease somewhat, while slower economic growth may once again become an important factor affecting asset prices. However, Fernandez-Aller remains cautious about the market outlook before year-end. He believes that with European political risks, emerging-market volatility and AI-related credit concerns not yet fading, global financial markets may still face a new round of shocks.