Extreme Bets on Higher Yields Inflict a New Kind of Pain Trade

Record Treasury shorts could get squeezed in a big way.
Photographer: Gary D'Ercole/Getty Images

In the rush to price in firming economic data and the seemingly inflationary policies of President-elect Donald Trump, bond bears might have gotten ahead of themselves.

That's how analysts are reading the most recent report of trader commitments, which shows investors are making record bets on higher yields. In the first week of the year, futures positioning for U.S. Treasuries was at an all-time high of 1.2 million ten-year Treasury-contract equivalents, according to Macro Risk Advisors head derivatives strategist Pravit Chintawongnavich.

Based on past episodes when shorts swelled to extremes, Bespoke Investment Group says the rally in Treasuries since Dec. 16 may be poised to accelerate. "Historically, large duration shorts have typically led to bond rallies," the analysts write in a Jan. 11 note, referring to the pessimistic positioning on longer-maturity debt. "In our view, the pain trade in bonds is no longer higher yields."

Source: Bespoke Investment Group

The extent to which speculators are betting on higher yields may be signalling a rally of 50 to 100 basis points in the ten-year Treasury over the next three months, the Bespoke analysts said.

Source: Bloomberg

In other words, just as fixed-income gurus bicker over what level will mark the end of the decades-long bull market, it might be time to put duration back on the menu


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