Thursday, February 15, 2018

All Aboard-Treasury Yield Train

Enclosed is a look again at the net short position in 10yr UST equivalent for CFTC described ‘non-commercial’ accounts (‘large spec’), which depicts net positions for ED’s and all UST’s using a duration weighting.  Despite the turmoil in the global equity market, large spec actually added to their net short in the week ending last Tuesday. 

Skipping forward a week to yesterday’s highly anticipated CPI report and the higher than expected showing for that inflation gauge, many traders decided that they had found the missing link to pricing the Fed’s latest dot plot and possibly more.  New multi-year lows were made in UST 2’s, 5’s and 10’s, with Ten year Treasuries with yields hitting 2.92% (stretched further o/n to 2.94%).     

Finally, I’d point to the extraordinary jump in open interest as a result of trade yesterday.  All contracts from Fed Funds, ED’s and TU’s through WN’s showed open interest gains.  There were nearly half a million new positions assumed in the trading activity of Wednesday.  Given that many contracts made new multi-year lows in yesterday’s trade and settled at or very near the session low, we are strongly inclined to call out that session as significant. 

In the absence of a strong bullish reverse today, the bearish trend in Treasuries appears to have been re-engaged and hedge funds anticipate strong gains.