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Chart of the day - haters gotta hate
I open up my Bloomberg this morning and one of the top stories is: "Hedge funds place biggest-ever short on benchmark Treasuries" This is certainly something that will catch your attention

After all, I thought the bond market was bearish on the economy and thought we were going to have a recession? We do see the short-term interest rate market pricing in rate cuts this year in anticipation the Fed reverses policy and cuts rates due to falling growth

However, this price action would seem to suggest, as the byline on the article states, that "Leveraged funds may expect sticky inflation, Westpac says" If you felt higher for longer, you would look to short Treasuries

You can see from today's chart, which shows the CFTC data on the net position of leveraged money accounts in 10 year Treasuries, that the net short is the biggest ever and only rivaled by late 2019

There may be a few other explanations that I can think of though. The first is basis trades. The article also mentions this and while directionally I think this could be a point, I wonder aloud if it could be in this magnitude.

Yes, the Fed is no longer doing QE and so there should be more oppty to buy cash bonds and sell futures, making a small spread and therefore using leverage to do it as much as possible. However, I am not sure this explains all of it

This brings me to yield curve steepeners. This would be a bear steepening type of trade, popular after the GFC when traders feared policy could lead to runaway inflation. This is different than the bull steepening we were seeing in late 2020-21

It could also be hedging credit books after new issues. Many credit investors trade on spread and after new issues will look to lock in this spread by shorting Treasuries. This could be some, however, new issuance does not appear to be that large to explain all of this

The last thought I had was concerns over a debt ceiling. Yes, the MOVE Index has come off the peaks we saw a month ago but is still quite elevated. The debt-ceiling deadline seems like mid-June and this could be people setting up trades ahead of time

Should we care? I mean, the last time the short got even close to this big was in late 2019. Recall then the economy had been slowing markedly & some thought JayPo's back pedal would bail out the economy. Then Covid happened and 10 year yield went to 50 bps

We should care. Large positions like this, particularly in increasingly less liquid markets ahead of big potential catalysts are potential energy that could lead to disruptive moves that affect all assets. The 10yr is the benchmark yield not just for sovereign bond mkts but all mkts.

At the very least, it may suggest there is not 100% agreement in the immaculate disinflation camp as we may be led to believe. With a FOMC meeting on May 3, we may be set up for some interesting markets

Stay Vigilant
#markets #investing #bonds #benchmarks #stayvigilant

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