It appears wherever one looks in the markets there are the skidmarks of PIMCO adjusting to life after Bill Gross. First it was MBS (and related derivatives), then CDS indices adjusted as redemption expectations raised risk premia, and now it is the short-end of the Treasury curve. As The FT notes [12], 3-month Eurodollar futures (instruments enabling traders to bet on the front-end of the yield curve and thus more accurately pinpoint their bets on Fed actions) saw asset managers (cough PIMCO cough) liquidate a record 868,853 contracts in the week to September 30 – the largest one-week change on record (each contract has a notional value of $1m). This dramatic shift suggests both a disagreement with Gross' "new normal" view of rates lower for longer (since liquidation is concentrated around the 2-year maturities) and a need to meet liquidity requirements from redemption requests.
As The FT reports, [12]
Mr Gross was a big buyer because of his belief in a “new neutral”, in which US growth would be slow and rates stayed low.
After Mr Gross left, Pimco said investors pulled $23.5bn from the Total Return Fund during September, a monthly record. Commodity Futures Trading Commission statistics revealed on Friday that asset managers reduced their long eurodollar futures positions by 868,853 contracts in the week to September 30 – the largest one-week change on record. Each contract has a notional value of $1m.
“The story has been a liquidation of contracts across the two-year part of the eurodollar futures market,” said John Brady, managing director at RJ O’Brien, the broker.
[13]
Pimco declined to comment about whether it was closing out eurodollar futures contracts.
Traders say that a large decline in open interest for very liquid eurodollar futures in Chicago over the past week suggests Pimco has cashed in holdings to meet Total Return Fund redemptions. They noted big changes in open interest for contracts that were favoured by the Total Return Fund, notably the December 2015 and March and June 2016 contracts.
And BofA adds,
The drop in Open Interest in front-end futures contracts, "indicates that short positioning was largely concentrated in the short end of the curve in anticipation of a change in the Fed’s forward guidance and/or shift higher in the dots," BofAML strategists led by Priya Misra said in Oct. 3 report, adding "much of the mileage from the dots for front-end bears is now behind us"
It's clear that overall positioning of the front-end (2Y) remains notably short, though last week saw a modest reduction in that short it remains near 7 year highs...
[14]
Charts: Bloomberg
