BofA Cuts Year-End Risk Exposure, Flags Fragile Markets and AI Debt as Key Threat

Bank of America's macro trading team is reducing risk exposure into year-end and avoiding large bets, warning that fragile markets could see any small surprise trigger a fresh round of position unwinding. Carlos Fernandez-Aller, the bank's co-head of global FICC macro trading, said the team is currently carrying relatively limited risk. Fernandez-Aller told Bloomberg in a Thursday report that sharp swings in European rates have made macro funds especially hard to run this year. He pointed to French political protests pushing government bond risk to its highest since the euro debt crisis and the Brazilian real's more than 20-year largest drop on Monday after President Lula's re-election as evidence of how fast rallies can reverse. Rate markets are being pulled by oil above $110 a barrel, better-than-expected growth and swelling government debt concerns; the U.S. benchmark Treasury yield earlier this month touched its highest since 2002. BofA's FICC trading revenue fell 17% year-on-year in the third quarter on weaker mortgage, municipal and credit trading. Looking to year-end, Fernandez-Aller is focused on credit spreads, which he called the market's potential "last shoe to drop" amid growing investor concern over AI prospects and the debt technology companies are taking on to fund investment. He attributed Treasuries' renewed safe-haven bid to Fed Chair Kevin Warsh's strengthened anti-inflation commitment, suggesting markets may return to a "bad news is good news" pattern.