Financial –
Equities have seen a lot of attention since the election, and for good reason. They’ve matched to new all time highs on strong volume and we’ve also seen massive sector rotation in the process. However I want to take a look at the bond market today quickly ahead of the FOMC statement. Bonds have sold off aggressively as the market prices in both higher inflation and a tightening Fed. With the market fully priced in on a 25 bps hike today, the focus will be mainly on the outlook for rates in 2017 (largely via the dot plot). With that in mind, I just thought it’d be worth a quick look at a few charts surrounding the bond market today.
First up we should note the results of yesterday’s 30-year bond auction by the Treasury. The sale drew a yield of 3.152% which is the highest yield for such an auction since Sep ‘14. The higher yields might be encouraging a bit more participation. The bid-to-cover ratio was up to 2.39 from 2.11 in Nov. The Nov BTC was a well-below average level and among the lowest we’ve seen in the past 10 years. Additionally, yesterday’s auction drew more indirect bidders than we’ve seen lately. Primary dealers took “only” 26.8% which is the lowest since July.
Another interesting bit of news that caught my attention yesterday comes from a JPM survey of clients. The survey showed clients had the most short positions in Treasuries since Sep 14. You’ll note that is also the last time when 30-year auction yields were this high as mentioned above. This sort of bearish sentiment is displayed in the recent COT data as well. Attached I have a chart showing the combined non-commercial net position (futures & options) of 2s, 5s, 10s, and 30s. As you can see, the market is basically record short USTs.
While I certainly don’t want to imply I’m friendly to Treasury futures here, this sort of “extreme” in positioning is surely worthy of noting in front of a potentially major market-moving event such as the FOMC statement today.
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