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Traders place biggest treasuries short in over decade

[NEW YORK] After the worst losses for Treasuries in 10 months, investors are ramping up bets that the world's largest bond market will decline further.

A JPMorgan Chase & Co survey for the week through Oct 2 found that clients as a whole soured on Treasuries, with 44 per cent holding a short position relative to their benchmark.

That's the most since 2006 and up from 30 per cent in the prior period. Among those who actively place bets, such as speculative accounts, a record 70 per cent were short.

The shift shows how a confluence of factors is weighing on the minds of bond traders as the fourth quarter begins. The Federal Reserve will start unwinding its balance sheet this month, and Chair Janet Yellen has signalled that stubbornly low inflation won't deter policy makers from raising interest rates. 

Meanwhile, the betting markets are fluctuating on rumors of Ms Yellen's successor. Former Fed governor Kevin Warsh, seen by some traders as having a more hawkish tilt, and current governor Jerome Powell held the highest odds Tuesday.

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Mr Powell ducked questions about his interest in the position following a Politico report that Treasury Secretary Steven Mnuchin favors him.

In the eyes of William O'Donnell at Citigroup Inc, the selling pressure may have only just begun.

"The crowd of longs between seven years and 30 years in US rates is both heavy and also now slightly underwater," with yields near or above their 2017 averages, Mr O'Donnell, a strategist, wrote in a report Tuesday.

"It leaves us thinking that any additional positioning stress via higher rates may one day turn a trickle of selling into a torrent of secondary market supply under the right conditions."

On the other hand, big short positions can often be contrarian indicators.  For example, 39 per cent of clients were short in the week through Dec 12, which at the time was the most since 2015. On Dec 15, the benchmark 10-year yield reached 2.64 per cent, the highest in more than two years. It hasn't returned to that level.

At the moment, Treasuries don't look like the screaming "sell" they did when 10-year yields approached 2 per cent last month. In fact, with yields now at 2.32 per cent, the maturity is approaching oversold territory, based on relative strength index analysis.

That leaves traders eyeing 2.42 per cent, a high from May and also a key retracement level based on Fibonacci analysis.

"Short-term oversold conditions suggest that this support band should hold, at least initially," Mr O'Donnell said. But there's "still more upside for yields and USD, which should keep bears' hopes alive for a re-test of 2.60 per cent before the end of the year."


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