Having noted earlier the 44%, or 11-year high, in short Treasury positions among all bond traders (according to the latest JPM client survey), and a record high 70% among JPM's "active" clients, we suggested that the most likely next move in the Treasury sector is a squeeze on even the faintest news that derails the recent hawkish narrative. And, predictably if aonly for now, this morning Treasuries have ground higher, with 10-year note futures matching Asia session highs, and the yield on the 10Y sliding to session lows of 2.33%.
What about the catalyst?
It appears that the news that spooked the weaker shorts into covering this morning is a rerun of a story from Politico that contrary to last week's speculation that noted Fed "maverick hawk" Kevin Warsh is the frontrunner to replace Janet Yellen, that honor may fall to Fed governor Jerome Powell, a far more "dovish" candidate who, unlike Warsh, has never lashed out at the Fed's policies and who is the favored candidate of Treasury Secretary Steven Mnuchin. As a reminder, Treasuries tumbled last week following the widely circulated report that Trump was said to meet Warsh about Fed chair position, suggesting he was the President's preferred candidate. As Politico notes, that may not be the case:
MM spoke to a couple of other sources close to the Fed Chair selection process and they confirmed Kevin Warsh and Jerome Powell as the current front-runners with Treasury Secretary Steven Mnuchin said to be favoring Powell. That’s something of a head scratcher to outside observers of the process who did not have Powell on short-lists before the process began. Warsh was always viewed as a top contender though he does not really know President Trump.
These sources also said that Trump’s comment that he could make a decision in “two or three weeks” was not really a throwaway line and that the president really could tap someone in that short a time-frame. Or it could take a couple of months. It’s really up to the president to make a decision. The vetting process for the finalists is evidently very far along. Obviously some of the other final candidates including NEC Director Gary Cohn and current Fed Chair Janet Yellen are already heavily vetted and have all their paperwork in place.
Add to this what we noted earlier, and what Bloomberg's Edward Bolingbroke wrote this morning, namely that as a result of the extreme short positioning in the TSY space, the "the market leaves Treasuries open for short squeeze-driven gains", and one can explain today's sharp move lower in TSY yields.
Then again, the squeeze may be short-lived, because if one trusts the online betting market, despite the chatter of Mnuchin's support for the "conventional" Jerome Powell, Warsh remains a distant favorite even after the Politico report, with a 42% probability of being Yellen's replacement, more than Powell, whose latest contract has jumped to 35% (+8 on the day), with Yellen and Cohn a distant 3rd and 4th, with 18% and11% respectively. The latest rack from PredictIt: