(Bloomberg) -- This year’s sharp decline in funding spread suggests that institutional investors’ positioning in equities is shifting as markets rethink the Federal Reserve’s interest-rate path, according to strategists at Goldman Sachs Group Inc.
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The funding spread — a measure of demand for long exposure through equity derivatives such as swaps, options and futures — has tumbled to around 70 basis points from about 130 basis points in late December, they said.
“In our experience, large short-term moves in funding almost always mean that there has been a change in demand trends from professional investors,” the team led by Head of Derivatives Research John Marshall wrote in a note to clients. “We believe that pension funds, asset managers, hedge funds and CTAs have all been net sellers over the past few weeks.”
In a note earlier this month, Marshall already pointed at funding spreads, saying it’s “a significant warning sign for equity investors.”
Equity volatility has increased since the Fed indicated last month that it may slow down the pace of interest-rate cuts. Global stock and bond markets extended losses on Monday, after last week’s strong US jobs report reinforced wagers that the central bank will hold off on further cuts. Meanwhile, oil at a five-month high poses a fresh threat to inflation.
“Investor sentiment has declined sharply over the last 5 weeks to its lowest level in 14 months and is now modestly bearish,” Deutsche Bank AG strategists led by Binky Chadha wrote in a separate report. They noted that discretionary investor positioning has declined, while systematic strategies remain elevated. “They are likely to pull back if recently elevated volatility persists.”
--With assistance from Michael Msika.
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