On a week that saw Italian bond yields spike by the most on record sparking one of the biggest safe-haven bids for US Treasury bonds in years, the massively one-side shipwreck of Treasury short positions became even more one-sided-er as speculators ignored the collapsing yield curve, tumbling global economic data, and rising risk, adding to their already record long-date duration shorts…
After spiking above the critical 3.00% level the previous week, to its highest level since June 2011 – spurred by what in hindsight appears to be major rate-lock buying amid huge IG issuance; 10Y Treasury yields plunged almost 40bps in 6 days as Italian risk sparked a safe-haven bid in bods – the most dramatic rally since Brexit (June 2016).
This plunge in yields was even larger than the one that occurred in February during the XIV collapse (albeit over a slightly longer period of time)…24bps in 2 days
However, while June 2016’s bid for bonds sparked a major short squeeze in aggregate Treasury futures positioning, the last two weeks of massive yield compression have seen speculators adding to their already record net short positions – seemingly immune to such things as margin calls…
Levered investors (e.g. hedge funds) were the big drivers of the short as asset managers added to their net Treasury longs…
Interestingly, as the yield curve collapsed during the same two-week period to new 11-year flats…
Speculators added to their longest-duration shorts dramatically (both 30Y and the Ultras) while 2Y specs moved to a net bullish position (the most bullishly positioned since June 2016 – Brexit).
But as specs piled into long-dated duration shorts, they also unwound rate-hike bets dramatically – cutting sizes by almost half a trillion notional dollars in the last 3 weeks…
And furthermore, as futures speculators added sheep-like to their record shorts, Treasury ETFs saw a dramatic surge in inflows as investors sought safe harbor…
“It’s definitely a flight to safety,” said Aaron Clark, portfolio manager at Boston-based GW&K Investment Management. “Some memories are fresh with Greece and the issues that Europe was having in general, and the U.S. is always a sort of quality trade in scenarios like that.”
But it is not just “flight to quality” concerns that are likely to attract flows into US Treasuries. Relative to Bunds, 10Y UST notes have never been cheaper…
And as the global economy reverses course from “synchronous recovery’ to ‘synchronous disappointment’, it appeasr the yield cuvr was right after all…
And finally, DoubleLine’s Jeff Gundlach’s favorite bond yield indicator is signaling more room to fall for 10Y still…
One wonders just what it will take to rattle the record Treasury Bond shorts?
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