Yesterday, when discussing Crispin Odey's letter to clients and what appears to be his "Hail Mary" trade, we pointed out that according to his latest client letter, the billionaire hedge fund manager has effectively bet everything on a plunge in bond prices, with a whopping 135% net short in gilts and JGBs.
We noted that, in light of recent shifts mostly among the CTA and hedge fund crowd, he is hardly alone in his mega bearish outlook on bonds.
Sure enough, according to the latest JPMorgan survey (for the week through Oct. 2) the bank's clients as a whole have dramatically soured on Treasuries, with 44% holding a short position relative to their benchmark, the most since 2006, or before the financial crisis, and up from 30 percent in the prior period. Among those who actively place bets, such as speculative accounts, a record 70% were short, while an unprecedented (and impossible) 0% responded that they were long: in other words, everyone is on the same side of the boat.
As Bloomberg commented on the dramatic move, "the shift shows how a confluence of factors is weighing on the minds of bond traders as the fourth quarter begins. The Federal Reserve will start unwinding its balance sheet this month, and Chair Janet Yellen has signaled that stubbornly low inflation won’t deter policy makers from tightening. Meanwhile, in the betting markets, former Fed Governor Kevin Warsh, seen by some traders as having a more hawkish tilt, has the highest odds to succeed Yellen."
In the eyes of William O’Donnell at Citigroup Inc., the selling pressure may have only just begun.
“The crowd of longs between seven years and 30 years in U.S. rates is both heavy and also now slightly underwater,” with yields near or above their 2017 averages, O’Donnell, a strategist, wrote in a report Tuesday. “It leaves us thinking that any additional positioning stress via higher rates may one day turn a trickle of selling into a torrent of secondary market supply under the right conditions.”
Of course, with everyone "on the same side of the boat", a far likelier outcome is a massive squeeze as even the smallest deflationary event spark a scramble for the exits. One example, from the other side, can be seen in the week through Dec. 12, when 39% of clients were short, which at the time was the most since 2015. On Dec. 15, the benchmark 10-year yield reached 2.64%, the highest in more than two years. It hasn’t returned to that level. Subsequent record positions in early 2017 per CFTC Committment of Trader readings led to even bigger slides in Treasury yields, in turn leading to a near record long exposure just week later, only to lead to a move higher in yields.
Indeed as Bloomberg concedes, "at the moment, Treasuries don’t look like the screaming “sell” they did when 10-year yields approached 2% last month. Now at 2.34 percent, the yield is approaching the most oversold level in months, based on relative strength index analysis."
That leaves traders eyeing 2.42% , a high from May and also a key retracement level based on Fibonacci analysis.
“Short-term oversold conditions suggest that this support band should hold, at least initially,” O’Donnell said. But there’s “still more upside for yields and USD, which should keep bears’ hopes alive for a re-test of 2.60% before the end of the year.”
With few active traders left who can add to the short pile up, look for yields to glide lower once again as the next Tsy short squeeze materializes in the coming weeks.