The Commodity Futures Trading Commission (CFTC) Commitment of Traders reports show that the Eurodollar net short are the highest since 2006, according to the January 27 USD Rates Strategy report produced by the Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS).
A short interest rate price position is a bet that yields will rise. After rapidly climbing after the taper decision was announced, rates have been mostly declining in January, catching many long term traders by surprise, who have been watching for an interest rate increase. The ten year note, for instance, is today trading near 2.66%, benefiting from global market fears. It had touched a high of 3% in late December. Certain professional traders remain undaunted, expecting rates to continue their march higher in 2014 despite the short term decline.
New net shorts drivers of positioning
The net short position rose $0.99bn to -$35.19bn in Ten Year futures equivalent, the report noted. “The main drivers were new shorts in Eurodollars, Ten Year and bond contracts, which was partially offset by modest short covering and some new longs in Two Year.” The primary drivers of the position changes were new shorts outweighing new longs in Two Year and Five Year. The spec net short in Eurodollars is the highest since July 2006 at -$31.6bn in Ten Year futures equivalents.
“The long term picture for speculator and hedger net position still shows that the current level of positioning is at lofty levels, despite falling from the highest levels since April 2005,” report authors Jim Lee and Nicholas Kirschner noted. “We still think that the level of positioning along with the level of the market suggests that further short covering is in order, which should result in a bull flattening move in the rate market, with the belly outperforming on flies like 2-5-10 year,” noting the impact along the yield curve.
Open interest over the week in Eurodollars declined 140.5K contracts reflecting short covering, the report said, noting the spec net short in Eurodollars was 930.7K contracts. This is still a large net position despite the short covering while open interest in Ten Year Note rose as the market rebounded.
In regards to hedgers, their net long position declined $0.31bn to $89.89bn. Three weeks ago, the report noted, the print of $107.23bn in ten year futures equivalents was the largest since April 2005. “The main drivers were new shorts outweighing new longs in 2y and 5y, and new shorts and some long liquidation in Ultrabonds. This was partially offset by new longs outweighing new shorts in Eurodollars and 10y futures.” Like hedgers, asset managers’ net long declined by $7.39bn overall in 10y equivalents to $123.36bn. The primary factor was $10.07bn in new shorts outweighing $3.63bn in new longs in Ten Year.
Bucking the trend, levered money’s net long position rose $0.37bn to $9.89bn in 10y equivalents. The biggest changes were $6.52bn in new longs and $1.04bn in short covering in Ten Year note, the report said, and $5.10bn in short covering and $0.32bn in new longs in Eurodollars. Dealers paired back overall net short by $4.68bn to $73.71bn. “The main drivers were new longs and short covering in Eurodollars and Bonds, and short covering in Ultrabonds, which was partially offset by long liquidation and new shorts in Ten Year note,” the report noted.