Small Speculators Pile Into Treasury Shorts, Is a Short Squeeze Coming?

Mish

Across the yield curve, small speculators have plowed into Treasury short positions.

Treasury Bear Frenzy

Bloomberg reports Treasuries Bear Frenzy Was the Biggest on Record Last Week.

Bond bearishness hit a record level last week as investors piled into short bets on Treasuries.

An aggregate gauge of the change in net non-commercial positions across the Treasuries futures curve dropped by the most on in record, according to the latest Commodity Futures Trading Commission data. The change was equivalent to $45 billion in benchmark Treasuries net short positions, according to TD Securities strategist Penglu Zhao.

Specs piled into shorts across the curve last week as the market became agitated on Fed tapering and early hiking risks,” Zhao wrote Friday. “Dealers and levered funds were net buyers, while asset managers and other investors are net sellers.”

Barchart 10-Year Treasury COT

10-Year Treasury COT 2021-03-02

That is a chart of 10-Year Treasuries courtesy of Barchart. 

On the surface the above chart looks extremely ordinary. 

Shorts are nowhere near record levels as you can by looking at the red line (commercials) who take the opposite side of the speculators. 

Closer inspection of the data is more interesting.

10-Year Treasury COT 2021-03-02A

The commercial traders are only net long 278,002 contracts now vs. 852,899 on August 20. We are not close to a record now. 

But look who is leading the way. Small speculators are net short a whopping 182,391 contracts.

CotBase 10-Year Note Futures

10-Yr Not Futures

CotBase has a subscription but it does provide one year for free. It plots small speculators on a different scale. 

It's the small specs who are plowing into the shorts on 10-Year Treasuries. 

I went back 5 years on Barchart and I do not spot a larger short position by the small specks on this contract. 

CotBase 5-Year Note Futures 

CotBase 5-Year Note Futures 2021-03-05

CotBase 30-Year Bond Futures CotBase Interest Rate Complex 2021-03-04

CotBase 30-Year Bond Futures 2021-03-05

CotBase Interest Rate Complex 

CotBase Interest Rate Complex 2021-03-04

Small Specs Lead the Shorting

It's pretty clear who is leading the way on interest rate futures and it is also clear why.

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The concern is easy to see, too easy in fact. Futures trades so "obvious" that small specs pile on in record numbers don't get rewarded for long.

I suspect a strong rally in bonds will soon wipe out the latecomers into these trades.

Mish

Comments (6)
No. 1-6
bradw2k
bradw2k

Rising rates are their own worst enemy when there's levered assets everywhere ... careful not to pop any asset price bubbles.

bluestone
bluestone

I saw this in zerohedge and while its presented badly presumably for shock value the article is as a -4% a fee for lending cash against the security of treasuries. This is shorting treasuries to the extent that there is a shortage of them!! You say small speculators and I take your word for it but is this not similar to a crowd attacking an indefensible peg? i.e. Soros and the pound. As in a Gamestop style face off.

The fee usual situation is FLIPPED this is I want to borrow treasuries and will pay cash for the privilege. Why do I need to borrow the treasuries? So I can short them legally. The price is not negative, you have to pay at 4% to borrow the treasuries its a positive amount.
So people are so -desperate- to get into the shorting treasuries game they have -overwhelmed- the people who would normally lend out treasuries for cash for their day to day needs (and its viewed from this angle that the fee is negative). I did think that this would be unusual enough to warrant some change in treasury yields so I was interested to look today (monday) but nothing seems to have changed yet maybe because its the wee hours still in the US.

I suppose the finance sector know their own job but i imagine clearing out the shorts to be a somewhat risky endeavour."... and levered funds were net buyers"

Also although not connected I saw somewhere else that bank reserves held at the BoE due to QE, may not be redeemed. They just count towards balances.

(trust ok linking as zh does link to you/mish often enough)
www.zerohedge.com/markets/repo-wreck-10y-tumbles-below-fails-charge-trades-31-repo
probably better in this one
www.zerohedge.com/markets/repo-wreck-10y-tumbles-below-fails-charge-trades-31-repo

Six000mileyear
Six000mileyear

The quants and algorithms amplify trading activities, so it requires only a small number of people to change a trends direction.

LawrenceBird
LawrenceBird

Took back my short ZN a week too soon but am short Dec 22 eurodollars and SOFR3 at much higher level. Unless Fed goes negative, will be nice winners.

Bam_Man
Bam_Man

Multiple, huge gaps 10-15% up from here on the TLT chart.
They will be filled.
Perhaps in response to a stock market bloodbath, but who knows.

Bcalderone
Bcalderone

There is going to be a LOT of blood on the floor at the end of this process...


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