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@Redhouse (over yonder), my general sense is that people had gotten ahead of themselves on their tapering / hiking timelines. I've talked a lot about positioning in the past few days because in my experience this can be a very substantial determinant of near to medium term directionality in rates. When so many money managers are already max short, they have no choice but to hold their nose and buy when new fund deposits come in or coupons need to be reinvested. A lot of weaker handed / shorter time-frame players were also tactically short going into this week's FOMC and BOE meetings, hoping for a more hawkish outcome. All of these guys were forced to cover when they were proven wrong. This is what we're seeing today because these faster money guys just aren't about to carry their money-losing shorts through the weekend. That's a cardinal sin in the fixed income hedge fund world.
@SMCJB did an excellent job illustrating the repricing of the front end caused by these flows. First, the aggressive shorts pushing two-year yields higher, and then, the covering bid bringing them back in.
Early next week should be a bit more balanced as we have a bit of front-loaded supply coming in with $56bn 3s being auctioned Monday, $39bn 10s on Tuesday, and $25bn 30yr bonds on Wednesday. Thursday is Veteran's Day so once we make it through the auctions the potential for short covering can resume. That said, given how short money managers already are, there might be a bit of a grab-fest in 3s and 10s next week as well. I guess we'll see....
While the COT data does currently show a preponderance of shorts, it unfortunately captures only a small part of the fixed income universe and can therefore tell an incomplete story. The bulk of overall trading volumes in rates actually happen outside of the futures market in the over-the-counter cash markets. So the COT data will reflect some outright positions for CTAs and certain speculators, but also hedges and basis trades held by hedge funds and money managers who often carry offsetting positions in the cash markets.
At the bottom of the second post in this thread I embedded a chart showing data from the BofA Fund Manager Survey and another chart, compiled by Deutsche Bank, showing data from the Stone & McCarthy Research (SMR) Portfolio Manager Survey. These and other survey data (JP Morgan also has a good series) really help to augment the COT data and provide a far more complete representation of the overall fixed income investor universe. This is important because when someone like Blackrock, with their nearly $2 trillion in fixed income assets decides to adjust the positioning of their portfolios, the flows can have a significant impact on rates without ever directly showing up in futures.
As it stands right now, money managers, in the aggregate, are indeed very short. Many of the big balanced funds are underweight fixed income vs equities while the dedicated fixed income funds are short their duration benchmarks. They're so positioned because valuations suck (deeply negative real yields, thanks Fed), heavy supply is coming (massive ongoing deficit spending), and central banks are gradually reducing QE. All of which makes perfect sense from a long term, fundamental perspective. But in the short term, well, shorts can get squeezed a bit.
Anyone have any thoughts on the bond / rates markets here?
Ugly inflation data, front end now once again pricing in a more aggressive timeline for rate hikes, and a horrible Bond auction today. All very bearish headlines. Yet the bond contract is still UP a point and a half from its October close, and the bad news and supply are now behind us.
Where do you see rates going in the coming days / weeks / or through year end? How are you looking at the market here?
Very curious to hear people's thoughts. I don't really have a strong view because bearish fundamentals and somewhat bullish technicals (mostly just the positioning story) kinda cancel each other out a bit.
A flatter curve caused by only the short end rates rising suggests the market doesn't think the rise in rates will last for long. Suggesting either Japanification of the US economy, or a looming recession. However, there has also been a lot of demand for the long end of the curve because of Fed's bond purchases. So it's hard to blame the flat curve just on some sort of Fed mistake theory. If inflation is a significant problem then it could persist for a very long time, and that would lead to higher rates in the next 5-10 years, and reverse the flattener.
Yesterday the 30 year fought the move, but eventually had to capitulate. There was definitely some big players getting destroyed going into the 30 year auction. So it's very possible to see a regime change here. There's not as many big economic releases for the rest of the month so it should be more clear what the market really thinks.
The reaction to the 30 yr auction was a major move.
All the trading since has been "inside" that move.
We have been trending up since Oct 11.
The rally has been weak, in that price was unable to venture into the top half of the pitchfork.
A break below 161-9 (to me) indicates a swing down.
A break above 162 continues the up channel.
Interesting that ZN is well below the March low while ZB is well above that low.
This shows the flattening of the curve.
My bias is that ZB needs to catch up and take out the Mar lows F.US.USAZ21 60 Min #17 2021-11-13 18_48_57.190
I'd like to take a step back for a moment to look at the big picture context for the recent flattening moves. Pulling some charts from the FRED database:
Fed Funds - here we can see that during the last tightening cycle, fed funds effective rate peaked at 2.40% in December 2018, with the first cut in the ensuing easing cycle coming on Aug. 1 2019
Two year yields peaked at just under 3% about 6 weeks before the final rate hike in 2018, and then started to decline almost 9 months before the first ease. By the time that rate cut happened in August 2019, 2s had already declined to under 2% - substantially lower than the fed funds rate at that time - again leading the move to lower rates.
The 2s / 10s curve, meanwhile, was flattening the entire time that the Fed was hiking, and actually inverted (briefly) after the Fed had already started easing. (Remember, many people still consider an inversion of 2s / 10s to be a fairly reliable recession predictor.)
Larger movements in front end rates almost always lead actual changes in Fed policy by at least a couple of months, but during the last cycle the curve actually lagged Fed policy, only beginning to steepen in earnest a month after the easing campaign had started.
Today we see that the curve has been flattening - anticipating tighter monetary policy - for more than seven months already, having peaked at 1.60% way back at the end of March.
As of Friday, both the Fed Funds futures curve (see here) and the Eurodollar curve ( here) indicated that investors anticipate the first hike to occur probably no sooner than mid 2022, so at least 6 months out if not longer. So this suggests that the curve flattening began over a year before the first rate hike is likely to occur.
As indicated earlier, at least within the money manager community, the majority of traders are short. This is a negative carry position (giving up yield and rolldown) but potentially also an attractively risk profile, as the bull case means the Fed maybe tightens a bit less, while the bear case could imply far more rate hikes than expected and / or a potential supply-driven collapse in the treasury market.
The flattening suggests that investors are buying their required duration in the long end of the curve while avoiding the front end and belly. But maybe they've gotten a bit ahead of themselves.
Again, the flattening, having begun over a year before the first likely rate hike, seems like a pretty aggressive lead-time. This despite the fact that the Fed has been relentlessly telling us that they will be slow, gradual, and intentionally behind the curve on inflation (which they now clearly are).
With practically everyone currently short their duration bogeys and having captured some good outperformance, I anticipate profit-taking / risk-reduction / short covering to become a more dominant theme now as we approach the holiday season and year-end. This short covering is likely to result in a better bid for the belly of the curve (5s - 10s) as that most closely reflects the Barclays Aggregate Index to which most bond fund managers are indexed (the Agg currently has a duration of 6.77 years and an average maturity of 8.52 years), meaning that the curve, under such a scenario, could steepen back out a bit in the coming weeks.
Even if money managers maintain their shorts but simply shift some dollars down the curve where the carry is more attractive we should see some steepening pressure.
A steeper curve, by the way, is also consistent with the view that inflation will be stronger and more persistent than the Fed anticipates. Sub-2% 30yr yields DO NOT JIVE with core PCE inflation running at 3.6% (most recent) for the long term!
So in light of all of this I tend to agree with @trade888 that ZB should probably trade down, but I like owning ZF and ZN against it (I believe this is also consistent with the what @TWDsje suggested above).
As already mentioned earlier, this month's FOMC meeting, inflation data and long-end supply are now behind us, leaving investors just a week and a half to reinvest coupons and maturities, put new client cash to work, and maybe trim some shorts or shift some duration dollars down the curve before before Thanksgiving and month end are upon us. I don't know if the month's lows for 5s and 10s are already in (although Thurs / Fri price action looked a bit like rounding bottom on the hourly charts), but the closer we get to month end the more constructive I will be.
