Whether it was momentum traders doing what they do best, or just a market expecting Bernanke’s “communication strategy” to pan out as expected, and follow through with more easing in demand for duration assets, is unclear and largely irrelevant, but as the following chart by JPM shows, net spec positions in UST futures are at their most short since May 2010 and are close to two standard deviations below their average since 2006. The chart shows a duration weighted composite of the net spec positions on the 10YR, 5YR, 2YR, the T-bond, the Ultra long bond and the Eurodollar futures – it is these specs that goes hurt the most by today’s FOMC announcement. The question now is: will the scramble to cover shorts lead to a fresh push lower in yields (ending any talk of a rotation, great or otherwise), or following today’s shock and awe move in the curve, will the move wider in rates continue.
Some more observations from JPM: “Positions peaked almost exactly a year ago and have been falling steadily since, turning negative at the end of May. The most recent US Treasury client survey also showed investors are net short USTs, although positions are not extreme and remain less short than during the May/June rate selloff. (Treasury Client Survey, Alex Roever et al., Sep 13).”