Over the weekend, using the latest Commitment of Traders data, we showed something gold-traders had been aware in recent months [9] (and years): "having closed lower for 8 of the last 9 weeks, gold has become the momentum-chasing hedge fund community's latest target.... Managed Money added to its already record short position in gold futures this week, pushing the leveraged bets to the most extremely bearish in history."
[10]
But while the fear and loathing of gold by the "smart money" and central banks has been extensively documented in recent years, another asset class is emerging as the "most hated" within the speculator community: treasurys, or rather, duration.
Here is what Deutsche's Dominic Konstam says when looking at the latest CFTC net spec exposure:
Positioning in the speculator community is clearly in flattening with a heavy concentration in 2s and 5s. The overall position is bearish duration. This suggests that flattening is less straightforward than say early 2015. It would be consistent with a bearish resteepening out to 10s, where positions are relatively flat. In real money positions we also still observe a bearish bias with a marginal preference for flatteners, but this is small.
Here is DB's representation of this broad negative sentiment:
[11]
Here is another way to show the net US Treasury futs position in 10Y equivalent terms.
[12]
To be sure, this is not the first time that the hedge fund community has been extremely bearish US Tsys: at the start of the year we showed "The Two Most Crowded Trades As We Enter 2015 [13]" - one was long the USD, the other was short Treasurys.
Since then the positioning has gotten far more extreme, with the "Long USD" trade now over three times more crowded than the next most popular trade as shown last week [14]...
... while the negative sentiment on duration across the curve is now the greatest since mid-2010.
What is the implication? Perhaps that despite all of its recurring mistakes and declining credibility, the smart money refuses to fight the Fed, and is positioned just as the Fed would suggest (recall that when it comes to the short-end at least, "this is a market by decree [15]"). This is also its biggest error as time after time the Fed's desire to telegraph a recovery (either by communication or by reflexivity) has been proven wrong, in the process wiping out all those who were positioned for a far steeper curve, one which would presage an economic recovery driven by the banks.
It is also perhaps why despite the Fed's rate hike, the 10Y is now precisely where it was at the beginning of the year: after all virtually anyone who could have shorted the long-end, already has. Instead, what happens periodically is that any time there is a Fed-credibility crushing moment - and this year there have been many - the shorts unwind en masse, and send the yield on the long end plunging.
What does this mean practically? Back to Konstam: "Together positioning does suggest that the investor community is generally underweight duration, which limits the extent to which investors should be bearish."
And yet bearish (on duration) is precisely what the Fed would want the investor community to be positioned, and because of that the real "max pain" risk will be when the Fed is forced to acknowledge it was wrong once again, and halt the just unleashed tightening (whether or not the US economy will be in a recession then is unknown). It is then that this huge curve/duration short would be unwound, and considering the illiquid nature of the Treasury market, could make anyone positioned inversely to this second "biggest consensus" hate trade very rich on very short notice.
