Friday, April 7, 2017

US Treasuries; Bearish Hedge Fund Stubbornness Paying Off

It may appear somewhat remarkable that US Treasuries and Eurodollar futures have not been able to advance, or more specifically, hold earlier gains today following both a US missile attack against Syria and a weaker than expected jobs report.  In short, the bearish contingency has shown much greater resolve than might have been expected in the face of heightened geopolitical concern and somewhat softer than expected economic data. 

CFTC described ‘non-commercial’ accounts also known as ‘large spec’ accounts held record net short positions in Eurodollar futures last week.  Additionally, open interest data from the CME indicates that no appreciable change in positions has taken place over the last week.   Since January, this the trend toward increased short Eurodollar positions has gone largely unchecked, despite the rather steadily advancing Eurodollar and Treasury prices.    

Both commercial and non-commercial accounts have not backed away from their positioning strategies even as yields have fallen sharply since the last FOMC meeting (Mar 15th).  While we might applaud the commercial longs for having the insight to have held to bullish positions, their job has been somewhat easier than the challenge for the shorts.    Since the March FOMC meeting, December 2017 Eurodollar future (EDZ7) which captures the pricing of Fed activity through the first quarter of 2018 has removed about 75% of a 25 basis point rate hike previously priced.  Today, ten year Treasuries slipped below 2.3% yield twice earlier today, a level not broken since November.  They yielded 2.6% before the March FOMC meeting.  

Today, the bullish contingent had the opportunity to have taken advantage of conditions to impress their will against the struggling bearish shorts.  For some reason this did not happen.  Longs instead chose not to add to or otherwise support their existing positions to an extent necessary to provide bullish price action.  As such, we question their resolve and unless directed otherwise, will anticipate longs will reduce their positions as US fixed income prices fall over the coming weeks. 

Clearly, this is an unsettled situation and my expectations are not held with an overzealous level of confidence.  Still, the price action seems to be giving us a good indication that positioning conditions may change and that the bearish contingent may soon recover some greater control over US fixed income prices. 

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