It is clear that nobody likes bonds and rates continue to drift higher in wake of this mornings NFP top line MISS. The sell side has been very quick to point out all the good under the hood (see HEREfor example) and as such, the updated positions report (HERE) should NOT come as a shock,
Short build into FOMC with the cheapening driven by new short risk (which is a change from the long liquidation we have seen of late). More than $8m added to the short side with the largest activity concentrated at the front end (Eurodollar ED whites - $2m/zscore 3.5 as market looks to price in x4 rate hikes)
Short positioning is building to $15m (75th percentile) but not extended with investors not positioned to capture this cheapening => PnL is flat (short profits offset by long losses).
This thematic also aligns with franchise flows where positioning is not extended (AM longs post month end vs small shorts by Banks / HFs). Post NFP we saw HFs / AMs adding to the shorts concentrated 10y but this was offset by Bank buying (profit taking on shorts).
Where do we go from here? This sell-off is very different from the previous sell-off last year where UST touched 1.75% (at that point the market max short / max profit which is not the case today). The combination of lighter positioning and longs caught offside suggests there is more capacity to cheapen further despite stretched technical.
Hence short momentum intact but focus clearly on the short side where profits are concentrated - in TYs short 100% onside below 129-17 with resistance at 128-31 (where short side profits squeezed)
… FLOW THOUGHTS
Flows in UST swtiching from long liquidation (at the early part of the week) into the addition of new short risk. In contrast cheapening in Europe driven mostly by new short risk
Short positioning is building across short, medium and legacy positioning horizons but the heaviest short positions (and largest profits) are now concentrated in Europe
…In our own flows post NFP we saw bank buying into the cheapening (having been short => profit taking) and HF adding to short with the base to fade the flattening at the long end.
Lot of ‘meat on the bone’ in THE REPORT and as I see it, nothing extreme in as far as positions concerned. YET. Typically, when I see things like this, all I can think of is the process.
Shorts are built. They are right. They (aren’t the only ones who) stick around at the party too long. They then run for cover. Lather, rinse, repeat. OR, if you prefer, in the words of Statler & Waldorf,
