JPMorgan's Quants Warn Risks Are Growing for Bond Short-SqueezeBy and
Kolanovic highlights record short position in Treasury futures
Risk of ‘proper short squeeze’ in bond futures: Kolanovic
Investors have become so bearish on U.S. government bonds that they risk getting caught out, according to JPMorgan Chase & Co.’s quantitative and derivatives strategy team.
Short positioning in Treasury futures has climbed to a record, increasing the potential for an unraveling of trades betting on further declines in bond prices, Marko Kolanovic wrote in a note to clients. There’s also been an extreme swing in sentiment, with investors unduly focusing on higher inflation risks, said Kolanovic, who heads the team in New York.
“When there is such a large short position, there is always risk of profit taking, or worse, a proper short squeeze,” he wrote. “We also note extreme sentiment swings and the media playing into fears of inflation, while largely ignoring important points such as those most recently voiced by the Fed’s Harker and Bullard,” he said, referring to Federal Reserve district bank presidents Patrick Harker and James Bullard.
Reports on U.S. wages and consumer prices in January have given momentum to the sell-off in bonds that began in earnest last September, but Kolanovic argued that it’s important not to extrapolate trends from single data points.
“Inflation discussions have recently centered around ‘linear extrapolation’ of inherently noisy data points, and focus on old news,” such as minutes from the Fed’s January policy meeting, he wrote. “There is no mention of structural deflation via demographics or technology/AI.”
Meantime, Kolanovic indicated that the case for betting against volatility -- a trade that went fantastically wrong during the stock sell-off in late January and early February -- may not be dead. Selling equity index risk premiums can “work well” over time when “properly” managed, he said. They tend to do better in the wake of “disasters,” he concluded.