Monday, December 16, 2013

Is the treasury market oversold?

When it comes to treasuries, there is no shortage of bearish news. The budget deal is done, the third quarter GDP was better than expected (inventory build issue aside), and the US labor markets are supposedly getting better. Expectations of an "early taper" are running high, with the Fed poised to pull the trigger on cutting back securities purchases sooner than was originally thought. Moreover, bond funds outflows continue, with many investors dumping anything that has a fixed coupon. And if the fundamentals aren't bad enough, technicals for treasuries look terrible as well. Moving averages and other technical indicators are all screaming "sell".

Based on daily trend (source:

That's precisely what many investors have been doing since October, as treasuries resumed the decline which began last spring.


Now consider the following chart. It shows the aggregate speculate investor positioning in dollar rate-sensitive futures. The measure is duration weighted, assigning a higher weight to the 10y note futures than to bill futures for example.

Source: Credit Suisse

This tells us that "speculative" investors are building up what amounts to a large (relative to recent history) short treasuries position. And why not - so far all signs have pointed to this being the right trade. Until some of these trigger-happy traders begin to cover.

With all the bearish news out and everyone - including retail investors - talking about rising rates, the contrarian view would put the near-term risk in treasuries to the upside.
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