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The Last Time Bond Bears Were This Short, Treasury Yields Collapsed
Bond traders have not been this speculatively short Treasuries since early 2010. Since The Fed turned uber hawkish at the last FOMC, and convinced the market that it will raise rates in December - despite dismally dropping data everywhere, speculators have drastically increased their short positions across the entire Treasury spectrum. The last time the world was this short Treasuries, the 10Y yield collapsed from 3.94% to 2.39% in just 3 months.
(Chart shows aggregate net short speculative positioning across the entire Treasury futures curve - rebased to 10Y-equivalents)
Simply put, The Fed has created - through its constant communication and confusion - the biggest bear trap for bond traders... if a hike does not come in December, 2010's yield collapse could look like a stroll in the park, especially in the newly illiquid normal.
Charts: Bloomberg
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Bring it on. I've never understood why Treasuries trade wide of Bunds, OATs, or any of the euro paper. Guess it must be because U.S. growth potential is so much greater -- uh-huh, sure, riiight.
Or maybe Europe is more creditworthy because it's more stable politically. /sarc
They *can't* raise rates without blowing this whole fucking charade sky high. And 25bp is not a real hike (but it is a doubling from the current 25bp).
The Fed has talked for months/years about hiking - AND THEY NEVER DO IT.
On top of all that, a piddly little 25bp hike, there is no way they can actually return to real, historical rates, you know, like, 300bp, 400bp, 500bp. Just stop and think what equities would look like when you average corporate balance sheet suddenly turns into an average american's house hold balance sheet - where all that dividend money goes towards debt payment instead and there is nothing left over.
I get it, it is news, but I just get tired of all the ink spilled pretending about 25bp.
Regards,
Cooter
When the Fed began it's taper and subsequently ended QE, this was tantamount to starting the "new normal" rate hike cycle from peak "accommodation". I propose the Fed is already 18 months into this hiking cycle and in the later stages likely culminating in early 2016...prior to a new cycle of accommodation.
http://econimica.blogspot.com/2015/11/unconventional-monetary-policies-likely.html
For better or worse, new lows in the 10yr treasury and new highs for equities are the likely imminent outcome of a negative interest rate policy that only furthers the great divide between slowing economic and ramping financial activity (corporations paid to take loans with which to buyback their own shares). I'd anticipate some dollar softening as the Fed finally admits the "new normal" is long on "new" and short on "normal"...but the impact to be muted for commodities as NIRP continues to incentive producers to bring new capacity online in a world of massive overcapacity and decelerating global demand. Unfortunately, the sustainability of such a system is premised on ever greater central control and diminishing free market price discovery...such is the price of the "new normal".
Tightening (i.e. not replacing maturing bonds with new ones) is not the same thing as hiking interest rates ... which is the pablum that is constantly rolled out every couple of months.
So, I repeat; they won't hike their core fed funds rates.
Regards,
Cooter
Short treasuries at your own peril. I'll be selling to you when the ten year goes below 1%.
Me too! I'm very long right now (no jokes please!).
me too. you're safe as long as the 10yr yield does not close above 2.37. If it does, then we'll see 250 - 260.
we will see 1.86 (January high price) before we see > 2.37.
a massive flight to safety aka short covering can happen any day now. Watch the dollar for when this ignites.
The 10yr to the Bund correlation trade has also broken for about two weeks now -
Good Luck all
"This is Iron butterfly to tower, come in tower."
All of these shorts in a disinflationary, GDP-decelerating environment, no less.
Bond funds will keep on buying Treasuries even into negative yield. Because they are scared to death of the bubble in equities.
Bond funds will keep buying treasuries even at NIRP because that is what their charters mandate that they do.
Bond funds do not buy equities unless they are balanced.
The Fed will NEVER raise rates.......period
And yes yields will collapse...when these algo writing computer science PhD CTAs (prob living in their parents basement) all rush to cover.
The proper comparison is "the Yellen Crash" of 2014 when, I think contrary to what The Janet had desired, some big players forced yields back down, scaring the Fed off raising rates. Some big players made some big money, methinks. Does The Janet now have that under control, or not?
In the absence of any explanation, I assume that the large net short position in treasuries is the result of expectations for a drop in the PRICE of these notes and bonds (and an expectation for an INCREASE in yields). The superimposition of a yield graph onto a price graph is very confusing to a non-specialist. It would be interesting to know how much of this net price short is covered by collateral. If, as expected, the Fed attempts a small increase in its base rate, then these shorts will be rewarded. It remains to be seen what will be the mechanics of a rate increase, given the Fed's new activity in the reverse repo market as well as its enormous balances of commercial bank excess reserves.