Short squeeze to limit Treasury yield upside

SINCE January 2018, the 10-year Treasury yield has risen 49 basis points to the current high of 2.92 per cent as the market anticipates three more rate hikes this year. However, moving forward, we do not expect this trend to continue and see limited upside in the 10-year Treasury yield due to the overcrowded shorts in the bond complex that has been building up since February.

Keep in mind that the correlation between bond yield and bond price is inverse. In other words, a rising bond yield will equate to a falling bond price, and vice versa. The 10-year yield is closely watched as a key benchmark that prices other interest rates such as mortgage rates.

The Commodity Futures Trading Commission (CFTC) net speculative positioning barely exceeds below -210,000 contracts. When it does, short squeeze tends to happen as the market is heavily tilted on the short side. There were six occasions when the market was massively short the 10-year Treasury bond, and the implication was a rise in bond price and a fall in yield as the market goes into a period of short squeeze. On average, the 10-year yield fell -22 per cent.