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Below is a transcript of an interesting discussion from The Macro Show this morning. Watch the full clip above for more.

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Darius Dale: Question from a subscriber here. What do you think is the great threat to the TLT long position? Do we have enough cuts to the Fed Funds Futures that eventually causes a steepening of long-dated Treasuries?

Keith McCullough: The greatest threat to the TLT long position here is that you go into Quad 2. That’s the number one risk.

Put simply, we weren’t bullish on Treasuries for the entire two and half years that we weren’t in Quad 1 or 2. So that’s the catalyst. It’s not something you’re reading on Zero Hedge.

The risk is that people clearly missed this. Look at futures and options positioning released on Friday. There’s no position that’s leaning any one way in Macro because people have been getting killed.

But on rates positioning, I circled it. There’s still massive net short positioning across the Treasury curve. Right before the big move to the downside in Treasuries last week, Gundlach said, ‘Long maturity US Treasury price action today was consistent with a blow-off momentum top. I suspect buyer’s remorse will set in fairly soon.’

Can you imagine if you started shorting Treasuries last week with leverage like a hedge fund would have to do to realize a return? It was probably the worst week of the year for you. The 2-year Treasury yield was down -24 basis points. That’s 24 basis points in one week.

And that CFTC net positioning data reflects futures and options data through Tuesday of last week. So, in other words, Wall Street got more net short right before the big down move in bond yields.

So again, this is the big risk. It’s that people still don’t get why they should have bought Treasuries. They still don’t get it.  The Bond King himself understands it. I guess he just had the research wrong. If you understand that there are three components that would get you to buy Treasuries:

  1. Growth slowing
  2. Inflation slowing
  3. Profits slowing into a recession

On that third thing, you get another wave into Treasuries because everyone has to sell all their high-yield junk bonds and reallocate. That’s also what happened last week. High yield was up +40 basis points on the week to 4.33%. So again we’ve warned you about this and told you about this. If you want to ask me about what the risk is maybe it’s that you weren’t long enough of U.S. Treasuries.

3 Reasons Why Gundlach Had It Wrong - the macro show