From same firm that has, over the years, helped inform me of what happened while I was asleep so that I could, in turn, help inform my friends and clients of the same, comes the following insight to rates positions
UST - Cutting longs: $42m shorts (12bps profits) vs $42m longs (15bps profit)
Flows over the last couple of weeks have cut long positioning via a combination of new short risk and covering longs ($30m over the period mostly concentrated in the belly). Setup is now neutral (both in short term / legacy) with long losses offset by short profit - risk concentrated at 1.55% => range bound. Meanwhile, the cheapening has driven momentum account max short (long-end has flipped out of flatteners). Focus on the short side - support/ resistance at 130-05/129-02 in TYs.
In contrast, short risks/profits remains extended at the front end (ED legacy) with the market pricing in more than x3 rate hikes within the year. In ED Jun 22 shorts are around 20bps onside below 99.57 => short momentum with support / resistance at 99.37/99.45.
Finally, in curve, extended 2/10s flattener have been trimmed but still highly extended and vulnerable to steepening above 100bps. In contrast, more neutral setup in 10/30s but coverage ratio’s have moved to recent highs (given equity performance/30y cheapening) => ongoing support for long end flatteners.
The report is quite lengthy and has many more competent visuals than this one here, courtesy of investing.com — showing how very near we are to ‘support’ (129-02)
I’ve highlighted what looks to ME to be a clear BREAK of TLINE but it also comes with an extended move lower (ie overSOLD). They have much more including this section of note,
So where the risks? In rates the largest concentration is in curve where the market remains max long 2/10s flatteners in UST which are inprofit below 100bps.... but in Europe greater pain with 5/30y flatteners all being squeezed above 62bps.
AND they continue along in attempt to ask/answer,
Is there a setup for further aggressive cheapening? Looking at risk parity we do not see and overly extended setup in rates (or indeed in equities) => limited liquidation capacity. Meanwhile, looking at the coverage ratio for US pension schemes we see the recent cheapening in 30y rates / rally in equities have driven coverage ratios to recent extremes => ongoing bid at the long end of the curve.
Emphasis MINE and not only because it jives with the selloff running out of steam (ZH) … at some point? Eventually? But at some point, there are simply no bears left who need or have capacity to SELL more and pension systems are fully covered and may actually enjoy buying into this FI dip.
Food for thought…In any case, interesting stuff and there’s TON more information on report (if permissioned…)