Bond Traders Place Biggest Short in Treasuries in Over a Decade

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`Very Hard to Find Value' in Fixed Income, Investec Says

After the worst losses for Treasuries in 10 months, investors are ramping up bets that the world’s largest bond market will decline further.

A JPMorgan Chase & Co. survey for the week through Oct. 2 found that clients as a whole soured on Treasuries, with 44 percent holding a short position relative to their benchmark. That’s the most since 2006 and up from 30 percent in the prior period. Among those who actively place bets, such as speculative accounts, a record 70 percent were short.

The shift shows how a confluence of factors is weighing on the minds of bond traders as the fourth quarter begins. The Federal Reserve will start unwinding its balance sheet this month, and Chair Janet Yellen has signaled that stubbornly low inflation won’t deter policy makers from raising interest rates. 

Meanwhile, the betting markets are fluctuating on rumors of her successor. Former Fed Governor Kevin Warsh, seen by some traders as having a more hawkish tilt, and current Governor Jerome Powell held the highest odds Tuesday, followed by Yellen herself. Powell ducked questions about his interest in the position following a Politico report that Treasury Secretary Steven Mnuchin favors him.

In the eyes of William O’Donnell at Citigroup Inc., the selling pressure may have only just begun.

“The crowd of longs between seven years and 30 years in U.S. rates is both heavy and also now slightly underwater,” with yields near or above their 2017 averages, O’Donnell, a strategist, wrote in a report Tuesday. “It leaves us thinking that any additional positioning stress via higher rates may one day turn a trickle of selling into a torrent of secondary market supply under the right conditions.”

On the other hand, big short positions can often be contrarian indicators. 

For example, 39 percent of clients were short in the week through Dec. 12, which at the time was the most since 2015. On Dec. 15, the benchmark 10-year yield reached 2.64 percent, the highest in more than two years. It hasn’t returned to that level.

At the moment, Treasuries don’t look like the screaming “sell” they did when 10-year yields approached 2 percent last month. In fact, with yields now at 2.32 percent, the maturity is approaching oversold territory, based on relative strength index analysis.

That leaves traders eyeing 2.42 percent, a high from May and also a key retracement level based on Fibonacci analysis.

“Short-term oversold conditions suggest that this support band should hold, at least initially,” O’Donnell said. But there’s “still more upside for yields and USD, which should keep bears’ hopes alive for a re-test of 2.60% before the end of the year.”

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