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Treasury Surge Set To Continue: Hedge Funds Most Short The 10-Year In Three Years

Tyler Durden's picture




 

Over the weekend, when looking at the supply dynamics of global Treasury paper, we wrote "Bond Yields Set To Plunge In 2015: Next Year Global Treasury Supply Will Tumble By 20% As ECB Joins The Party." This morning, Bloomberg picks up on this with "The $6.3 Trillion Frenzy That Vanquished Treasury Bears", in which author Daniel Kruger writes:

When it comes to the ability of the U.S. government to finance itself in the bond market, this year will go down as as one of the best on record -- and dealers say 2015 will be no different.

 

There’s global demand for high-yielding, high-quality assets and the only one that’s in the game is the U.S. bond,” Thomas Tucci, the head of Treasury trading at CIBC World Markets Corp., said in a Dec. 12 telephone interview from New York. “People continue to undervalue it.” ... Wall Street forecasters, who cut their estimates for how much yields will rise for 11 straight months, now say there’s little chance they will reach 3 percent before the end of 2015 -- the same level where yields started this year.

 

Treasuries of all maturities have gained 6.1 percent this year, the most since 2011, according to index data compiled by Bloomberg. That’s pushed down yields on the 10-year note, the benchmark for trillions of dollars of securities worldwide, 0.86 percentage point to 2.17 percent as of 8:53 a.m. in London. At the start the year, forecasters projected 10-year yields rising to 3.44 percent on expectations the Fed’s stimulus would boost the economy and allow the central bank to move toward ending its six-year-long policy of holding interest rates close to zero.

None of that is new. What, however, assures that the relentless low in TSY yields continues is that, courtesy of a market that is so broken and counter-intuitive that for a record 6 years bad news is good news, and the worse the economy the higher stocks and bonds go, hedge funds will continue bidding up Treasurys, which they bought on hopes that this time the recovery will be right around the corner.

And sure enough, as BofA reports overnight, hedge fund specs "sold 10-yr contracts increasing net short position to largest in three years. 10-yr contracts have now been sold in six of past seven weeks."

From BofA:

10-yr T-notes

 

Large speculators strongly increased their net short position to -$25.8bn from -$20.1bn notional.

 

With equities resuming their larger bull trend, and 10s reversing from 2.067%/2.040% resistance, the bear trend is resuming. A break of 2.227% confirms, targeting 2.404% & beyond.

 

As we said over the weekend, see you in the mid- to upper-1% range soon.

 

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Mon, 12/22/2014 - 09:18 | 5580571 buzzsaw99
buzzsaw99's picture

1% on the 10y is in the bag.

Mon, 12/22/2014 - 09:43 | 5580619 Rainman
Rainman's picture

I bet none of these ' forecasters ' can find Japan on a map.

Mon, 12/22/2014 - 09:54 | 5580648 madcows
madcows's picture

right now it is just shy of 2.2

i hope your right, as i've been betting treasuries over stocks, but my pants are getting hot.

but, seriously, where are you going to hide?  stocks are pumped, bonds are supressed and cash is getting destroyed by inflation, oh, and PM's are heavily manipulated.

when the shit show starts, i'm betting people jump back in to treasuries.  that's where i'm hiding. 

FU FED.

Mon, 12/22/2014 - 12:46 | 5581245 PartysOver
PartysOver's picture

I often wonder if those knucklehead Preppers are getting it right.   Buy land, seeds, long term storable food stuffs, and protection (that would be guns and ammo).  Toss in a little gold just in case.   Or not.  All I know is that "IF" it goes south it will go in a hurry.

Mon, 12/22/2014 - 10:07 | 5580676 kaiserhoff
kaiserhoff's picture

and after that -1%?

Mon, 12/22/2014 - 09:21 | 5580575 negative rates
negative rates's picture

That's right, see ya, don't want to be ya.

Mon, 12/22/2014 - 09:23 | 5580577 NoVa
NoVa's picture

someday -

10yr has to close below 210 first, then 190.  resistance below 190 is nowhere to be found- 

good luck

 

Mon, 12/22/2014 - 09:52 | 5580644 buzzsaw99
buzzsaw99's picture

when japan public debt to gdp hit 100% their 10y was at 2,5%. When it hiw 200% it was 1.5%. About the time debt/gdp in the usa hit 100% the 10y ~ 2.5%. When usa debt/gdp hits 200% there is only one direction it can go. There is no market, there is only the central bank gangsters.

Mon, 12/22/2014 - 10:00 | 5580664 NoVa
NoVa's picture

not sure if US goes "Turning Japanese" in near term (1 to 3 years).  

of bigger concern in near term is if Inflation expectations continue turning lower and lower.  When required real rates of return hold and get bid in Long term fixed income investments, then you are right on.  

We will see 1% (and possibly lower yields).  Till then, we have 20 ps to rally through 1.9%.  

I use 2.2% as a buy for TLT and sell 2.1% or lower, then jump into TBT for the trade back up to 220.  Been a good trade.

NoVa

Mon, 12/22/2014 - 10:41 | 5580811 buzzsaw99
buzzsaw99's picture

you might as well make a few bucks on the volatility as bonds are going nowhere fast and you aren't likely to get stuck in a position you can't get out of on the long side. short term anything can happen, long term we're all dead, medium term 1% is in the bag imo. the trend is your friend even if it moves against you in the short term. personally i ain't selling until i see the whites of their eyes.

Mon, 12/22/2014 - 09:23 | 5580578 Bernoulli
Bernoulli's picture

"Markets" damaged beyond repair. We are doomed.

Mon, 12/22/2014 - 09:25 | 5580581 NoDebt
NoDebt's picture

Our damned slacker government not running big enough deficits to feed the demand for debt.

-  Paul Krugman

Mon, 12/22/2014 - 09:28 | 5580585 Soul Glow
Soul Glow's picture

It's simple econimcs!

Mon, 12/22/2014 - 09:27 | 5580583 Soul Glow
Soul Glow's picture

I would care if Hedge Funds were ever right.

Mon, 12/22/2014 - 09:28 | 5580584 101 years and c...
101 years and counting's picture

apparently, everyone thinks this time is different.  since 2008, when the fed stops printing, yields crumble with stocks.  for some reason, everyone thinks yields about to soar along with stocks this time.

Mon, 12/22/2014 - 09:28 | 5580588 Soul Glow
Soul Glow's picture

People have the attention span of a mouse.

Mon, 12/22/2014 - 09:41 | 5580615 SheepDog-One
SheepDog-One's picture

True, right now we have various steeple in town for the holidays, in their opinion things have never been better and everything is peaches and cake.

Mon, 12/22/2014 - 09:29 | 5580586 wmbz
wmbz's picture

 "The process [of debauching the currency]  engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

~J.M. Keynes 

Mon, 12/22/2014 - 09:31 | 5580589 Comte d'herblay
Comte d'herblay's picture

It's probably more accurate to think of the U.S. (and global economy) as a very large ship like the Titanic, that DID NOT sink, but with a gash in its rib cage.  For efficiency purposes it could also be reduced to the size of a one man kayak, with small hole in the carbon fiber that leaks about a bucket of water every half hour.

At that site, are innumerable men and women, with bailing buckets.  As long as there are sufficient number of passengers, and crew working 366/24/7 eternally bailing out the incoming water, the boat will float, not get very far, and will not sink very much more than it already is.

As passengers die off and are not replaced, the ship will rise a bit each year, but if the passengers who are idle, only screw and reproduce, adding more people each year, the additional weight reaches a tipping point that causes it to ride lower in the water thus requiring more buckets and bailers.

This will be an enternal ongoing effort as certain as the rotation of the earth into the sun to reach the horizon, each and every morning.

There's probably a fable some where in Aesop's output that covers this truth.

Sail on, mon freres.

Mon, 12/22/2014 - 09:35 | 5580593 db51
db51's picture

I be one of the poor fucks on the bucket brigade.

Mon, 12/22/2014 - 10:46 | 5580823 YHC-FTSE
YHC-FTSE's picture

Not the greatest analogy in the world. It's the Titanic. Its got a gash. Its watertight systems are shit. It's going to sink. No amount of bailing is going to stop it. Simples.

Perhaps a better analogy of the US economy is described by Douglas Adams' Golgafrinchians who adopted the standard leaf as legal tender, then realized over-abundance of trees made everyone "rich" and brought hyperinflation. So they burned all the forests down, declared war on various bit of land and frightening nouns.

Mon, 12/22/2014 - 09:40 | 5580608 SheepDog-One
SheepDog-One's picture

Global monetary reset picking up steam, soon everything will be at -0-

Mon, 12/22/2014 - 09:39 | 5580609 Fed-up with bei...
Fed-up with being Sick and Tired's picture

What is the Dollar Yen telling us, seriously?

Mon, 12/22/2014 - 09:54 | 5580646 Seasmoke
Seasmoke's picture

Should be great news for Gold. 

Mon, 12/22/2014 - 10:02 | 5580666 SheepDog-One
SheepDog-One's picture

Should be, but in reality gold will probably get dinged another 1% today at least.

Mon, 12/22/2014 - 10:21 | 5580734 Dr. Engali
Dr. Engali's picture

Shorting treasuries? There are some stupid ass people running these hedge funds.

Mon, 12/22/2014 - 10:35 | 5580781 negative rates
negative rates's picture

With no where to hide you can short just about anything and still have some stupid ass people running hedge funds.

Mon, 12/22/2014 - 10:35 | 5580779 The Merovingian
The Merovingian's picture

I'd like to see that last chart over-layed with the actual 10YR yields to see how they correlate.

Mon, 12/22/2014 - 10:37 | 5580789 negative rates
negative rates's picture

I'd like to see the pain in your neck removed, but that don't mean it's gonna happen.

Mon, 12/22/2014 - 10:35 | 5580786 falak pema
falak pema's picture

How is a Dow index at > 1800 compatible with 10 bonds < 3% in 2015 ?

What happened to risk and return? 

How many shades of gray to the gray swans; I hope the financial markets are not confusing "gray" and "gay" ! 

http://www.marketwatch.com/story/call-it-a-gray-swan-10-risks-that-could...

Mon, 12/22/2014 - 11:04 | 5580867 andrewp111
andrewp111's picture

It is very compatible. The DOW produces a dividend yield. The lower Treasury yields go, the higher the DOW gets bid. If long term Treasury bonds go all the way to 0%, the DOW and S&P should approach infinity - as long as the earnings hold up. If the earnings falter, then the stock indices will behave like Japan did over the last 20+ years.

Mon, 12/22/2014 - 11:28 | 5580957 falak pema
falak pema's picture

conclusion : moral hazard = 0 for all asset classes! 

Lol, That makes sense ! 

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