Thursday, January 16, 2014

Bond bears seem overextended

Directional investors/traders remain heavily short or under-invested in the bond market. For example the CFTC commitment of traders shows speculative investors, particularly the smaller ones, being quite short the 10y note futures.

Source: Barchart (thousands)
"Comm" stands for "commercial" futures participants, such as dealers who use futures to hedge their positions

Institutional investors are also heavily under-invested in bonds. The so-called "real money", such as pensions, endowments and insurance firms were overweight duration (holding higher bond positions than their targeted allocations) when yields were the lowest (back in 2012). Now with higher yields, these same investors (after being whipsawed by the market) are running duration levels that are the lowest since 2008.

Source: DB

These technical factors should provide some support to treasuries in the near term in spite of the Fed's taper - particularly if the equity market does not perform as well as many are expecting. 

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