Hardly Anyone Is Short Treasuries; Perhaps They Should Be

Authored by Simon White, Bloomberg macro strategist,

Survey data shows that outright shorts in US Treasuries are near lows. But investors are missing a trick as inflation risks point to higher bond volatility and yields.

JP Morgan’s Treasury Survey tracks their clients’ positioning in Treasuries, asking them whether they are long, neutral or short. The net of the positions is close to flat, but outright shorts are unusually low, with the number of clients saying they are positioned that way near the nadir for the 20-year history of the survey.

The Commodity Futures Trading Commission’s Commitment of Traders data has speculators net short Treasuries, but this is hugely distorted by basis trading (i.e. cash bonds versus futures). However, a position proxy for bond futures (see here) shows positioning is falling but is still net long.

(This proxy, whose methodology is explained in the chart, circumvents the distortion to Commitment of Traders data from the basis trade, i.e. trading the cash bond versus the future.)

The survey rings true in that traders are reducing long Treasury bets as recession risks have receded, but are still reluctant to go outright short.

But bond yields look to be coiling for a larger move.

Bond volatility has been falling, despite upside growth and inflation risks.

There is a yawning disconnect between inflation volatility and bond volatility. Uncertainty in inflation has been rising, and that typically means more volatile yields.

The gap is likely to be closed by rising bond volatility, and given the inflation backdrop, yields are poised to remain elevated.

The few bond shorts that are out there look to be in good shape.