Wall Street is betting on rising interest rates.
As we noted last week, speculative short positions in the Treasury markets continue to hit all-time highs, a tacit bet on rates rising. Our call has been to take the other side of that trade, as the U.S. economy slows in the back half of 2018 and Treasury yields continue to make lower highs.
It seems that view has also been adopted by Jeffrey Gundlach, CEO of DoubleLine Capital.
Here's the latest from Bloomberg this morning:
A giant of fixed-income markets is warning that a build-up of speculative short positions in the U.S. Treasuries market is setting those traders up for pain ahead.
Net short positions on 10-year Treasuries from hedge funds hit the highest level on record, according to the latest data from the Commodity Futures Trading Commission. For Jeffrey Gundlach of DoubleLine Capital LP, the extreme nature of that positioning has raised the risk of a possible short squeeze, where an increased appetite for U.S. bonds forces bearish investors to cover their bets.
Now, let's break down the data we've been highlighting recently...
Wall Street consensus moved shorter of 10-year and 30-year contracts week-over-week. In the 5-year, the record short positioning from last week was trimmed by 38,000 contracts on the margin (i.e. 38,000 contracts longer). The absolute net SHORT position is now 805K in the 5-year. The net SHORT position in the 10-year increased by 49,000 week-over-week is now 611,000 contracts which is an all-time high. So consensus short positions in 5 and 10-year contracts are still big macro themes.
Furthermore, we’re seeing both the US Treasury 10-year and 2-year Yield signal a series of lower-highs. On the 2-year that’s new as of last week. On the 10-year, that’s been our call since going long both the Long Bond (TLT) and Bond Proxies (REITS, Utes, etc.) at the beginning of Q318.