Once upon a time, news and fundamentals mattered.
Then the Fed came and ever since then the main question has been where the highest concentration of shorts is, just to squeeze the margin call daylights out of them, and generate alpha (a strategy we highlighted back in 2012 [5]).
And while shorting crappy, illiquid stocks has not worked for a long, long time because under ZIRP capital is misallocated with reckless abandon usually ending up promptly in the most worthless companies, it was not until the past year when the shorting brigade decided to assault the most liquid, allegedly, instrument: the US Treasury bond itself.
It is here where said brigade has stumbled again and again, and where despite promises of an economic recovery and inflation (and thus higher rates), the 10Y, and especially the 30Y, continue to plough ever higher, much to the amazement of the "it's all getting better brigade" signalling nothing but economic contraction and deflation for the future.
And, as Citi's Amitabh Arora points out, things for TSY shorts are about to go from bad to worse. To wit:
Flow Analysis: Over the last 3 months we have seen good appetite for EGBs, net buying of USTs, and flat demand for JGBs. However, the buying of USTs hasn’t been in 10s where the main short is located. Hedge funds are accelerating their buying of EGBs (across the curve) and decreasing their selling of USTs. Real money has resumed their buying of USTs and has started to sell EGBs.
Futures Positioning in US. Since 2010, the CFTC has published a supplement to their weekly commitments of traders report specific to financial products. Asset managers are long, while dealers, hedge funds, and other buy side investors are short. Using alternative positioning indicators, we assess where we can give credence to the CFTC data, and where there is more to the picture than the CFTC data reveals.
Two main position imbalances
The clearest position concentration is short USTs (Figure 1). As the grey shaded squares indicate, the short has increased materially over the last 3 months. Equally importantly, there is an absence of corresponding longs in any client group to balance these shorts. Together that points to the prospect of even lower UST yields.
[6]
In other words, as wave after wave of shorts enters the "it's going to crash any minute now" Treasury short, what will continue happening is precisely the opposite, sending yields ever lower until finally the Fed will have to step in and warn that it may be about to sell TSYs in order to launch the long-overdue repricing, first in rates and then in risk.
