Yves on unusual bond dealer behavior, submitted By Yves Lamoureux of Blackmont Capital
We keep hearing about a return to normalcy in financial affairs.
Spreads are back in line and risk appetite is healthy so we should all be feeling good.
I specialize in the behaviour of market participants. This week I am interested in pointing out the very unusual behavior of the 18 primary bond dealers in US Treasuries.
As indicated on the graph under A the trend of the 30 yrs Treasury does match with good correlation the buying and selling of the primary dealers.
Dealers have been averaging a net short position of Treasuries of more than - $100 billion since late 2002. The 10 year average stands at over -$ 60 billion net short bonds.
At the point B we got to the most short position that dealers held at a record over -$ 190 billion net short bonds. It also corresponds to the high yield of 30 yr Treasuries at that time.
Point C is where it gets interesting as dealers go net long bonds.There is no doubt that halfway in 2008 dealers reducing the net short to about -$ 25 billion (yellow line) was a precursor to the giant move up in the bond market toward the end of that year.
Point D shows a very rare long position at record of over $93 billion.
If fear is gone you would expect primary bond dealers to reduce considerably the current holdings of bonds. Point E shows that it is not the case and hoarding in treasuries continue.The latest uptick shows a net long position at over $16 billion. A very rare and unusual behavior from bond dealers. We look for long term treasury prices to go unusually higher.
Yves Lamoureux, Investment Advisor, Blackmont Capital inc.
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