positions update showing potentially MORE fuel for the fire …
>>> UST - Short Build: $56m shorts (20bps profits) vs $35m longs (27bps loss)
Short positioning is growing driven by $20m long liquidation (start of the week) vs $25m new short (at the end of the week) but no change in the thematic - short positioning is not extended ($20m/80th percentile) with short profits offset by long loss.
Did the cheapening attract buyers in cash/swaps? Yes, but not in size, with the largest activity by Banks (profit taking on shorts?). Meanwhile structurally, the longer term setup is little changed - Insurance buying in 30y, AM maintaining longs (post EOM), HF/Banks now neutral with a bias for 2/10s steepener and long swap spreads.
This setup is very different from previous recent sell-off where the market held extended positions both in cash and swap. So despite extended technical (given size and speed of the move), there appears to more capacity to further cheapen due to :-
Light positioning in both futures and cash
Extended long in ETFs nominals (and real)
Extended 2/10s flatteners still dominate in legacy
Short momentum intact but focus clearly on the short side where profits are concentrated - in TYs short 100% onside below 128-20.
We are clearly there now, best I reckon with momentum oversold,
Enough of MY armchair QB visuals with their (at LEAST 20min delay) … from THE REPORT, asking
So where next? Setup is very different from previous selloffs with light positioning in rates, extreme positioning in legacy 2/10s flatteners / UST govt bond ETFs. However, cheapening in 30y rates look increasing attractive for ALM player => flatteners and focus on the short side profits
It’s that last little bit (emphasis MINE) which keeps me on the hook anxiously awaiting whatever it is yet to drop from HIMCO …
haters gonna hate but there is reason to believe rates are attractive for someone, somewhere … and it’s not just ME saying it but … this, observed from SELLSIDE,
5 January 2022
Interest Rates Research
Light at the end of the tunnel
Treasury yields have risen sharply since the beginning of the year, driven primarily by reduced worries about the adverse effect of the Omicron variant, in our view. With 10y yields now close to our forecasts, we expect a range-bound environment. Balance sheet runoff should have limited effect on long-term rates.
…We think the term premium is likely to remain negative, as investors should be willing to pay up for the diversification benefits of owning long-term USTs (Figure 5). Early policy normalization would likely reduce the perceived risk of the Fed's falling behind the curve on inflation, keeping a lid on the term premium and long-term rates.
Sorry BUT this was the only ‘light at the end of the tunnel graphic I had — turns out this is from 1yr ago, today,
Turns out, the more things change, the more they DO in fact, stay the very same…
