Yellen-Driven Short-Squeeze Sends Bonds To Best Quarter In 4 Years

After The Fed jawboned the world into the largest aggregate net short position in Treasuries in Q4 since 2010, its rapid realization that all is not well in the real world - and subsequent talking (and walking) back of rate-hike expectations - has sparked the biggest short-squeeze in 6 years and sent Treasuries up by the most since 2012. With odds collapsing for any more rate-hikes in 2016, as Yellen admits their forecasts are worthless, it seems - just as in 2010 - the bonds shorts have a way to go.

The Fed should “proceed cautiously” in raising interest rates, Yellen said in New York. The chance of a move by the end of 2016 has declined to 64 percent, from 73 percent at the end of last week, futures prices compiled by Bloomberg indicate.

The 10-year note yield slumped eight basis points on Tuesday, the most in seven weeks, and fell two basis points earlier Wednesday. U.S. government securities have returned 3 percent this quarter, based on Bloomberg World Bond Indexes.



Yellen’s speech "was more dovish than I expected,” said Wontark Doh, head of overseas fixed-income investment in Seoul at Samsung Asset Management Co. Ltd., which manages $200 billion. “The upside for Treasury yields is limited."


"Yellen came out as dovish and as forceful as she was" at the Fed meeting in March, when officials kept rates unchanged and scaled back forecasts for how high they’ll rise this year, said Barra Sheridan, a rates trader at Bank of Montreal in London. "I didn’t think April was a live meeting before Yellen spoke yesterday and I definitely don’t now -- nor does the market."

All driven by the biggest Treasury short-squeeze in 6 years (which was forced upon investors by The Fed's jawboning)...

And finally, the constant jabber from The Fed demandingthat investors short bonds continues...

Central-bank policies have pushed long-term Treasury yields to “very low” levels, San Francisco Fed Bank President John Williams said in Singapore before Yellen’s appearance. He said the threat of a “pretty big correction” in bonds supports the argument for gradual rate increases.

How's that working out for you? It appears fighting The Fed in bond-land has worked very well recently.

As The Wall Street Journal reports, bond traders are confused and concerned...

“It is confusing because the recipe keeps on changing,” said Anthony Cronin, a Treasury bond trader at Societe Generale. “I think it does create more volatility because there is just so much uncertainty over what is important to the Fed.”


Most concerning to Mr. Cronin was Ms. Yellen discussion of “potential global risks.’”


This uncertainty “can do more harm in itself and become self-fulfilling,’” he said. “Why would a company commit to investing in their business if the Fed Chair is worried about the economy slowing from overseas developments?”


The Fed’s mixed messages rippled through U.S. government bond yields, the dollar and gold over the past week.




“I believe that Yellen really believes that the downside risks of tightening too soon far outweigh the risk of waiting and maybe being a little late,” said Tom di Galoma, managing director at Seaport Global Securities LLC. “The Fed is market dependent at this point and not data dependent.”

As we have said for a long time, The Fed is Dow Data-Dependent.