The potential disruptive impact of artificial intelligence and escalating geopolitical tensions are triggering significant repricing in global capital markets. This has prompted systemic funds to undertake a massive withdrawal from US equities, shifting instead into traditional safe-haven assets such as US Treasury bonds and gold.
Influenced by weakness in technology stocks and uncertain macroeconomic policies, US stock markets have experienced notably heightened volatility in recent months. The actual volatility of the S&P 500 has reached its highest level since last December. In this environment, 'fast money' reliant on quantitative signals has reacted swiftly. Systematic investors, including Commodity Trading Advisors (CTAs), are drastically reducing their exposure to US stocks, with some funds even cutting their equity allocations to zero.
This panicked capital flight has directly fueled a strong rebound in safe-haven assets. According to Bloomberg, US Treasury bonds posted their best monthly performance in the past year during February, with long-term bonds showing significant gains. Simultaneously, the price of gold broke through resistance, surpassing the $5,000 per ounce mark.
Currently, with expectations that the Federal Reserve will maintain its benchmark interest rate unchanged, a defensive mood prevails in the market. Investors are awaiting further macroeconomic data to confirm the direction of the labor market and inflation trends. Until then, the trend of capital shifting toward high-quality assets is expected to continue dominating the market.
**Quantitative Funds Rapidly Offload US Stocks** As the continual launch of AI tools sparks concerns about industry disruption and inflation trajectories, coupled with warnings from former President Trump regarding Iran negotiations that have heightened Middle East tensions, anxiety is spreading on Wall Street. The S&P 500 has seen an average intraday swing of 1.2% this month. Technology stocks have borne the brunt of the selling; NVIDIA experienced a sharp decline of up to 5.8% in recent trading sessions, dragging down the Nasdaq 100 Index.
Confronted with this turbulence, quantitative investment management firms have quickly pivoted to a defensive stance. Data from Barclays, cited by Bloomberg, indicates that CTA funds, which rely on mathematical models, have reduced their US equity allocations to around the 50th percentile. Data from Goldman Sachs' trading platform shows that systematic strategies' exposure to US stocks turned negative this month, while client demand for downside protection surged dramatically.
Trend-following fund McElhenny Sheffield Capital Management reduced its equity allocation to zero on February 6, moving entirely into gold and US Treasuries. Grant Morris, a portfolio manager at the fund, stated that when the market breaches risk management thresholds, the fund transitions fully into a defensive posture and will only re-allocate to US stocks upon the emergence of a clear upward trend.
**Safe-Haven Demand Drives Best Month for US Treasuries** The capital outflow from equities has directly benefited the $30 trillion US Treasury market. According to EPFR data, approximately $16.3 billion flowed into the US government bond market in the first two months of the year. This has pushed the yield on the benchmark 10-year Treasury note down by about 0.2 percentage points since the end of January, hovering near the lower end of the 4% range. Overall, US Treasuries returned 1.5% in February, with long-term bonds gaining 4%, marking their best performance for the period since last year.
James Athey, a portfolio manager at Marlborough Investment Management, noted that the US Treasury market's vast size and high liquidity make it the premier destination for safe-haven flows. Gregory Faranello, Head of US Rates Trading and Strategy at AmeriVet Securities, also pointed out that despite potential for technical breakouts, the Treasury market possesses clear safe-haven characteristics.
The positive effect is not confined to the US; global sovereign bond markets have also been buoyed. Japanese government bonds are heading for their largest monthly gain since November 2023, with overseas investors' purchases of Japanese debt last month reaching the second-highest level on record.
**Substantial Structural Upside Remains for Gold** Amid strong demand for capital preservation, gold has also experienced explosive gains. As a traditional hedge against macroeconomic uncertainty and equity market pullbacks, gold's safe-haven value is being magnified once again in the current turmoil.
Jackie Rosner, Managing Director at PAAMCO Prisma, highlighted at the iConnections Global Alts conference that despite the recent sharp rally, gold remains structurally under-allocated in institutional portfolios, with current allocation levels still below those seen 15 years ago. He projected that if macroeconomic uncertainties persist, the gold price could reach $6,000 or higher this year. For institutions that have already shifted from US stocks to gold, this strategy is showing early success; for example, McElhenny Sheffield Capital Management has achieved a return of 4.35% year-to-date.
**Market Awaits Rate Clues and Economic Data** Although a risk-off sentiment dominates, some investors remain cautious about going all-in on US Treasuries due to lingering uncertainty around the Federal Reserve's policy path. In January, Fed policymakers held borrowing costs steady in the 3.5% to 3.75% range, and traders now see almost no chance of a rate cut in March. However, the market still anticipates at least two rate cuts by year-end, potentially around the time a Trump-nominated successor, potentially Nellie Liang, might assume the Fed Chair role.
Priya Misra, a portfolio manager at J.P. Morgan, believes that as the market reprices credit risk, the interest rate risk associated with holding Treasuries becomes more attractive. However, investors like George Catrambone, Head of Fixed Income at DWS Americas, and Marlborough's James Athey have begun adopting neutral or short positions on the 10-year Treasury, arguing that the rapid decline in yields needs a pause.
For sidelined capital, clear economic data is a prerequisite for entering the market. Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, stated that only clear data showing a weakening labor market would confirm the authenticity of the bond market's rally. The upcoming US non-farm payrolls report next week may provide crucial guidance for the market's next move.
