Bond traders all-in on the big short bet in the US Treasury market

Photographer: Sarinya Pinngam / EyeEm / Getty Images

It is not only in stocks itself that the plight of short sellers is a key theme. Short bets are increasingly popular in the $ 21 trillion treasury bill market, with crucial implications for all asset classes.

The 10-year benchmark yield hit 1.62% on Friday – the highest since February 2020 – before immersion purchases from foreign investors have emerged. Stronger-than-expected job creation and appearance of Federal Reserve Chairman Jerome Powell lack of concern, for now, about rising costs of long-term borrowing has encouraged traders. In a telltale sign of the way they lean, demand to borrowing 10-year notes on the repo market is so important that rates have turned negative, possibly as part of a move to short the maturity.

The trio of upcoming fiscal stimulus, super-easy monetary policy, and an accelerated vaccination campaign are helping to shed light on a post-pandemic reality. The bearish bond scenario naturally carries risks. More importantly, yields could rise to the point of scaring stocks and tightening financial conditions in general – a key indicator on which the Fed focuses to guide its policy. Even so, Wall Street analysts don’t seem raise the end-of-year yield forecasts fairly quickly.

“There is now a lot of tinder set on this fire for higher returns,” said Margaret Kerins, global head of fixed income strategy at BMO Capital Markets. “The question is, how the higher yields are too high and really put pressure on risky assets and push Powell to act” to try to reduce them.

Stock prices have already shown signs of vulnerability to rising yields, especially technology-intensive stocks. Another area at risk is the housing market – a positive point for the economy – with mortgage rates jump.

Soaring yields and growing confidence in the economic recovery prompted a large number of analysts to recalibrate 10-year rate expectations last week. For example, TD Securities and Societe Generale raised their year-end guidance to 2% from 1.45% and 1.50%, respectively.

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

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