Nomura Fears "Fatigued" Bond Bears Face Imminent Squeeze As The Fed Is "Generally Priced-In"

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by Tyler Durden
Thursday, Jan 13, 2022 - 12:51 PM

The "bearish US Rates / USTs" trade is locally feeling quite "fatigued" and Nomura's Charlie McElligott warns that the extreme-positioned market is susceptible to further monetization from the payers/shorts.

Source: Bloomberg

Specifically, McElligott warns 'bears' that we'd need to see fresh +++ data surprises to see the market able to price-in additional hawkish tightening at this juncture - or a stickier (and more dangerous) scenario being the much-discussed  "Wage/Price-Spiral" kicking-off.

Source: Bloomberg

The Nomura strategist confirms this view even as more Fed speakers (now Daly and Harker) join the ranks of officials signaling March liftoff, and most communicating comfort with 3-4 hikes this year. A quick glimpse at the STIRs shows the last few days have seen March rate-hike odds hit a new cycle-high but the Dec 2022 expectations are fading very modestly (and are below the prevoious peak earlier in the week)...

Source: Bloomberg

"Think about it," says McElligott, in the past week, we have seen:

1) the Fed Minutes (and speakers thereafter) confirm Balance Sheet run-off beginning mid-year and alongside simultaneous hikes;

2) US Unemployment dipping below 4%; and

3) US CPI YoY at 7%

Yet, EDM3 (June ’23 Eurodollar) is unchanged week-to-date and TY has RALLIED, which is telling us that the Fed, at this juncture, is generally “priced-in."

Furthermore, the chief strategist notes with the near-certainty too that “the longer the trade sits and stops working,” that Shorts / downside trades in UST futs and ED$ will be incentivized to "profit-take," as the following table shows, CTAs are 'all-in' short...

Specifically, McElligott points out the following key levels to watch in rates/bonds..

  • ED4, currently -100.0% short, [99.395], buying over 99.52 (+0.12) to get to -83%, more buying over 99.53 (+0.14) to get to -66% , flip to long over 99.55 (+0.16), max long over 99.56 (+0.17)

  • JPY_10Y, currently -100.0% short, [151.05], buying over 151.21 (+0.16) to get to -83%, more buying over 151.22 (+0.17) to get to -66%, flip to long over 151.34 (+0.29), max long over 152.27 (+1.22)

  • GBP_10Y, currently -66.1% short, [123.35], more selling under 123.8 (+0.45) to get to -83%, max short under 123.79 (+0.44), buying over 126.6 (+3.25) to get to -62% , more buying over 126.61 (+3.26) to get to -57% , flip to long over 130.4 (+7.05), max long over 130.41 (+7.06)

  • EUR_10Y, currently -100.0% short, [170.22], buying over 170.86 (+0.64) to get to -83%, more buying over 170.87 (+0.65) to get to -66% , flip to long over 175.67 (+5.45), max long over 175.68 (+5.46)

  • USD_10Y, currently -100.0% short, [128.578125], buying over 130.45 (+1.87) to get to -83%, more buying over 130.46 (+1.88) to get to - 66% , flip to long over 133.2 (+4.62), max long over 133.21 (+4.63)

And if rates reverse lower, that will lift some of the feet on the throat of 'long-duration', hyper-growth stocks, which are trading at the range lows in Nomura's Tech Sentiment Index...

And while we have seen US Equities Indices kinda "stall-out" here in the absence of Tech leadership, due to the recent "Secular Growth" revaluation shock over the past month or so, but, in recent days, Nomura notes that there has been a transition from Equities folks being “concerned about downside risk” to now, a more front-footed one, even somewhat more “offensive” dynamic playing-out yday a few different ways:

  • Sellers of IWM “crashy” downside (Jan 198P sold 20k, Jan 200P sold 26k, Jan 195P sold 77k!)

  • VIX Jan20C sold 30k to close (1mm in Vega, 25k in vVol), while separately seeing a client buyer of Feb 21P

  • Overall US Equities Options market yday saw $13.5B of Call premium trade vs $7.5B of Put premium

More broadly, Nomura is also seeing this “pivot from left to right tail” focus in SPX Jan Skew, where so far YTD, the dynamic is clearly “downside offered, upside bid”:

So McElligott concludes there is then scope for a constructive scenario which could play out for Large Cap US Tech Equities—and with it, help lift broad US Eq Index—from the recent malaise:

  • Macro-wise, the aforementioned “fatigue” being seen in the “bearish Rates” trade on hawkish Fed being “priced-to-perfection” at this point—which means US Treasury Yields now may be able to consolidate and help pause pain from the “(cheap) Value / (expensive) Growth” rotation bleed, ESPECIALLY as you see Tech / NDX / SPX rally here on this morning’s PPI marginal “disappointment” vs heady expectations

  • Locally as noted, Dealers are now back in “stable regime” of “+ Gamma vs spot” territory in QQQ options (flip line down at 386.50), while Delta is pushing ever-nearer to “neutral” up at 390.07 in QQQs, with almost +$17B of $Delta picked-up in recent days off the lows

  • Tech positioning locally  is much cleaner now, as per flows and PB data—hence the prior Vol metric “extremes” in QQQ options are coming off the boil (Skew, Put Skew, Term Structure)

  • Also, from a much longer-horizon—but the “pull forward” of this potential catalyst can matter in the shorter-term…US Mega / Large Cap Tech historically derive a substantial portion of their Revenues from overseas—where currently, we see Nasdaq 100 @ ~40% of all Revs from outside US; so this “Weaker USD” trade which is brewing can help act as a tailwind for the largest Tech players, particularly under the guise that R.O.W. growth can also begin to pick-up again

The net of all this, as SpotGamma notes, is that we have a fairly defined upside range, capped by 4800 for the next week. As long as the S&P500 holds >4700 its likely gamma builds around current prices, and this leads to a pin in the ~4750 area. Currently SpotGamma's EquityHub snapshot shows a gamma “node” at 4670. The indication here is that if the S&P breaks 4700 it could lead to a quick test of 4670, then we see hedging flows changing which could lead to support at the 4670 line.

This pinning leads to a decline in realized volatility, which should drag implied volatility. This adds some supportive flow to market prices.