Primary Dealers Net Treasury Long Positions Spike To 2010 Highs, Is There A Major Derisking Occurring In PD Portfolios?
The FRBNY has disclosed that Primary Dealer bond holdings have surged to 2010 highs, with net Coupon holdings of nearly $20 billion, and all Treasuries (including Bills) accounting for $36 billion. Contrast these holdings with the lows recorded in late January in which Coupons were a net short position of ($24) billion. Bills have also surged by $32 billion from ($15) billion on February 17, to $17 billion on March 24. Incidentally the accumulation has occurred even as recent Bill and Coupon auctions have been very week over the past two weeks. Are PDs becoming unable to offload auction allocations? After all this is capital that the Primary Dealers would much rather use to gun the stock market than be locked up in instruments yielding virtually nothing. Alternatively, if PDs are accumulating Treasuries, could this merely be an indication that they are reallocating capital away from equities and to USTs? Furthermore, Corporate bond holdings have dropped to near 2010 lows - is there a major shift away from risk (yes, that includes stocks) occurring under the surface? Altogether, PDs have spent $33 billion to cover shorts and accumulate fixed income instruments (including Agency and MBS) over the past month, and $60 billion Year To Date.
Expanding beyond Treasuries, the chart below shows the decline in virtually all other asset holdings by PDs, except for MBS, which has just hit 2010 highs.
The same chart in table form:
With virtually no fixed income shorts remaining in PD portfolios, one wonders what the source of capital is. As can be seen above, PDs have spent nearly $60 billion YTD, especially since starting to cover Bill and Coupon shorts. Is the funding coming merely from currency carry trades? Or are PDs now also short equities, which would be a big surprise in light of the market low volume melt up. If the last is true, the could be the biggest contrarian play seen by the Big 18 in a while, as all major banks have lately been extremely vocal in their endorsement of the stock market. Have the PDs learned from Goldman and are taking just the opposite side of the trade they recommend? The stock market action over the next few weeks should (dis)prove this thesis.
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