Bond traders go all-in on the big short bet of the US treasury market

Photographer: Sarinya Pinngam / EyeEm / Getty Images

It is not just in the actions of memes that the fate of short sellers is a key theme. Short bets are increasingly in vogue in the $ 21 trillion Treasury bond market, with crucial implications across all asset classes.

The 10-year benchmark yield reached 1.62% on Friday – the highest since February 2020 – before buying plunge from foreign investors. Stronger-than-expected job creation and the appearance of Federal Reserve Chairman Jerome Powell the lack of concern, for the time being, about rising long-term borrowing costs has encouraged traders. In a telltale sign of which path they are tilting, demand The 10-year loan on the repo market is so big that the rates are negative, probably part of a movement to sell on maturity.

The triad of more fiscal stimulus ahead, ultra-easy monetary policy and an accelerated vaccination campaign are helping to bring about a post-pandemic reality. It is clear that there are risks to the bearish bond scenario. More prominently, yields can rise to the point of scaring stocks and restricting financial conditions in general – the main metric on which the Fed focuses to guide policy. Still, Wall Street analysts don’t seem to Increase end-of-year income forecasts quickly enough.

“There is a lot of bait now being put on fire for higher yields,” said Margaret Kerins, global head of fixed income strategy at BMO Capital Markets. “The question is where is the higher yields that are very high and really put pressure on risky assets and put Powell into action” to try to contain them.

Stock prices have already shown signs of vulnerability to rising yields, especially high-tech stocks. Another area at risk is the real estate market – a bright spot for the economy – with rising mortgage rates.

Rising yields and growing confidence in the economic recovery have prompted a number of analysts to recalibrate expectations for 10-year rates last week. For example, TD Securities and Societe Generale increased their year-end projections from 1.45% and 1.50% to 2%, respectively.

Asset managers, in turn, reached the largest share sold in 10-year notes since 2016, show the latest data from the Commodity Futures Trading Commission.

Auction pressure