Guest Post: Observations On Unusual Bond Deal Behavior
Yves on unusual bond dealer behavior, submitted By Yves Lamoureux of Blackmont Capital
We keep hearing about a return to normalcy in financial affairs.
Spreads are back in line and risk appetite is healthy so we should all be feeling good.
I specialize in the behaviour of market participants. This week I am interested in pointing out the very unusual behavior of the 18 primary bond dealers in US Treasuries.
As indicated on the graph under A the trend of the 30 yrs Treasury does match with good correlation the buying and selling of the primary dealers.
Dealers have been averaging a net short position of Treasuries of more than - $100 billion since late 2002. The 10 year average stands at over -$ 60 billion net short bonds.
At the point B we got to the most short position that dealers held at a record over -$ 190 billion net short bonds. It also corresponds to the high yield of 30 yr Treasuries at that time.
Point C is where it gets interesting as dealers go net long bonds.There is no doubt that halfway in 2008 dealers reducing the net short to about -$ 25 billion (yellow line) was a precursor to the giant move up in the bond market toward the end of that year.
Point D shows a very rare long position at record of over $93 billion.
If fear is gone you would expect primary bond dealers to reduce considerably the current holdings of bonds. Point E shows that it is not the case and hoarding in treasuries continue.The latest uptick shows a net long position at over $16 billion. A very rare and unusual behavior from bond dealers. We look for long term treasury prices to go unusually higher.
Yves Lamoureux, Investment Advisor, Blackmont Capital inc.
The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.
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