Bond traders go all-in on the Big Short Bet of the US Treasury Market

Photographer: Sarinya Pinngam / EyeEm / Getty Images

It’s not just with meme stocks that the fate of short sellers is an important theme. Short bets are increasingly popular in the $ 21 trillion Treasuries market, with critical implications across all asset classes.

The 10-year benchmark return reached 1.62% – the highest since February 2020 – earlier on Friday dip purchases from foreign investors emerged. More jobs than expected and Jerome Powell, chairman of the Federal Reserve, seems the lack of concern, for the time being, with the long-term rising cost of financing, has encouraged traders. In a telltale sign of which way they are leaning, ask Borrowing 10-year notes in the repurchase agreement market is so large that interest rates have turned negative, likely part of a move to shorten maturities.

The trifecta of more fiscal stimulus to come, a very simple monetary policy and an accelerated vaccination campaign help to portray a post-pandemic reality. There are, of course, risks associated with the bearish bond scenario. Most notably, yields can soar to the point of scaring stocks and tightening financial terms in general – a important yardstick on which the Fed is targeting as a guiding policy. Still, Wall Street analysts don’t seem to be able to do that increase year-end revenue forecasts fast enough.

“A lot of tinder is now being lit for higher yields,” said Margaret Kerins, global head of fixed income strategy at BMO Capital Markets. “The question is what the point is that higher returns are too high and really pressurize risky assets and push Powell into action” to try to dampen them.

Stock prices have already shown signs of vulnerability to rising yields, especially for tech-heavy stocks. Another risk area is the housing market – a bright spot for the economy – with mortgage interest rate jump.

The sharp rise in yields and growing confidence in the economic recovery prompted a whole host of analysts to revise expectations for the 10-year yield over the past week. For example, TD Securities and Societe Generale increased their year-end forecasts from 1.45% and 1.50% to 2% respectively.

Asset managers, for their part, reversed to most net short positions on 10-year notes since 2016, according to the latest Commodity Futures Trading Commission data.

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