A Red-Hot Treasury Trade Starts to Unwind Every New York Morning

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With the Federal Reserve expected to take a more relaxed approach on inflation, something that became known at the virtual Jackson Hole Symposium on August 27th, bond traders have since been positioning for a steeper yield curve. Overbond AI models optimize curve flattening and steepening on corporate spreads and sovereign underlying benchmarking against a large number of similar issuers and security levels. Our unique AI models help enhance bond trading workflows and provide for a more streamlined trading process. Get in touch with Overbond to find out more.

Despite barely budging during the Asia and London trading sessions — home to some of the bigger buyers of longer-dated Treasuries – 30-year yields have dropped an average of five basis points each day this week between 7 a.m. and noon New York time. Those moves ramped up again on Thursday, accelerating as demand for haven assets pushed yields to their lowest in three weeks amid the worst rout for U.S. equities since June.

30-year bond yields slide each day this week as New York session begins

One trader in New York, who asked not to be named as he isn’t authorized to speak publicly, said the buying earlier this week was dominated by accounts taking off bets against long-maturity debt, as popular so-called steepener trades are pared down. A flurry of Treasury futures action on Thursday offers further evidence that investors are unwinding these wagers or calling it quits.

Positioning for a steeper yield curve, where rates on long-dated debt rise more than those on shorter Treasuries, has been a hot strategy in bond markets in recent months on the expectation the Federal Reserve would take a more relaxed approach on inflation — something that came to fruition at a virtual Jackson Hole confab on Aug. 27. Yet even as Wall Street strategists reiterated their “steepener” recommendations, 30-year yields have fallen more than 15 basis points to 1.35% Thursday, having risen from 1.22% at the start of April.

Crowded Trades

The disconnect between analyst calls and the price action — and between domestic and overseas traders — likely reflects some paring of a crowded trade in the U.S., rather than emerging bets on a flatter yield curve. Investors also look to be taking off similar positions on German debt.

The scale of the crowding is evident in the latest data from the Commodity Futures Trading Commission. Net short positions in U.S. long-bond futures from speculative accounts were near the largest since 2006, according to data for the week ended August 25.

The timing of the recent moves has stood out to Citigroup Inc.’s Edward Acton, with the strategist commenting on the recent trend of “real money” purchases in a note to clients Wednesday.

“Treasuries saw a familiar pattern of intraday trading, as a weaker overnight opening faded into the New York open, with the long-end reversing losses and then some on cash buys and aggressive futures block buying,” he wrote.

On Thursday, preliminary data showed a net drop in open interest — or the amount of outstanding risk — across Treasury futures following the previous day’s trading activity. Most of the drop was in contracts for 30-year bonds and five-year notes, which are predominately used in tandem for curve wagers, and is consistent with further position unwinds.