Thursday, November 10, 2016
Record Jump in Volume and Open Interest Point to Strong Trend in Rates Market
While US Presidential Elections were the headline news yesterday, there was another largely unseen development that in my world was rather striking. US fixed income had a wild ride yesterday starting with election results flow leading to a ‘risk-off’ bid coming into Treasuries. Later, many argue that inflationary implications of Trump policy views pushed yields higher. Fewer, but a grudgingly increasing amount of folks are starting to ask if better economic growth prospects could be driving interest rates higher.
Today, we see some follow through of Treasuries and Eurodollar futures moving lower again. This add-on price weakness lends creditability to yesterdays weak settlements. A lower settle today would bolster the case for still higher yields forthcoming across the curve.
The CME issued a statement indicating that a number of record volume marks were bested yesterday. Here is a link to that statement (CME Group Volume Reaches All-Time Daily High of 44.5 Million Contracts on November 9). We see high volume levels as also making more important price movement.
Additionally, positioning changes help to determining the strength of a trending market. When trending prices encourage market participants to increase their positions, the trend is generally noted to have strength. Using this as reference, yesterday’s Eurodollar price action and therefore the recent bearish trend was accompanied with an enormous amount of implied strength.
Open interest in Eurodollar futures rose by 334,000 contracts, which by my exam reviewing data back to mid-2009, is a record jump in open interest. With futures lower again today, it tells us that all of the 334,000 new buyer positions from yesterday are losing money. More importantly, it tells us of a growing interest in this market and in the bearish trending prices. This leaves room for additional losses (higher interest rates) forthcoming.
For Eurodollar futures, this is the highest level of open interest since September of last year. There is a lot of position interest in the short end of the yield curve. Additionally, we know that CFTC described ‘non-commercial’ accounts are as short Eurodollar (futures and options) as they have ever been. Last week they increased their net short by 74,000 to a new record short of 1.61m contracts.
Over the last few years, hedge funds positioning for higher interest rates in the coming year have been very wrong. Maybe like the Chicago Cubs, this could finally be their year.