It seems the memo went out and the sellside cognescenti and keepers of all things positions and data driven have agreed. The ONLY reason for whatever little bit of a bid for bonds over the past few days is … short covering.
Said another way,
For somewhat more granular look at the data than visual above, and having skimmed note below, here’s a best effort visual of FV vs 119-29,
Looks to be ~1.48 on cash and this will matter somewhat more **IF** you care to read on a bit…
Short covering dominated at $8m over the last couple of trading sessions as yields found resistance to further cheapening. Positioning is not extended over the usual medium term 3m horizon (at $17 / 75thpercentile). However, in shorter term positioning (based on flows over the last month) we find it remain highly extended short (particularly in the belly) but profits are melting => oversold technicals and short term head wind to further cheapening.
In our own flow we continue to see Banks buying while hedge funds remain short but this is all happening in a low volume / low energy environment across futures, cash and swaps. Longer term positioning remains light with the largest exposure in 10/30s steepeners (profit taking) and long swap spread.
So where are the risk? The belly is where the short risk is concentrated and is the most most sensitive part of the curve. However, CTAs remains 100% onside with large moves of more than 15bps required before they start to trim the short side (short momentum).
In FV short term 1m positioning is highly extended ($12m/ -4.0 /95th percentile) and vulnerable to further richening above 119-29. However longer-term setup (in futures / cash / swaps) is less extended and hence limited capacity to aggressively richen on short covering => better to add to shorts into richening?
… In USTs, we see positioning is rather balanced (at 17m) with moderate longs (at $35m / 23bps loss) offset by moderate shorts (at $52m / 13bps profit). However, in Europe short positioning is larger and more skewed to shorts.
…So where are the risk? In UST fast 1m positioning has rapidly built into shorts (particularly in the belly FV) is extreme both in terms of positions / profit. Into richening profits are now all being squeezed.
Short momentum? Yes - short are broadly onside but there are vulnerabilities with the largest risk concentrated in 5y where there has been a rapid build of longs. In the fast 1m positioning the set-up is highly one-sided short (across the entire complex we see $38m short / 10bps profit vs $3m longs / 17bps loss) and in FV short profits are at risk on moves above 119-26… but limited fuel for richening driven by aggressive short covering …
Lets NOT forget where we go from here, and a note from earlier today suggested there can only be More shorts to come
