US Treasury net shorts haven’t been significantly reduced by the increased short-covering last month, and long positions in European and Japanese government bonds (EGB, JGB) have only gotten longer, but these crowded positions create vulnerabilities if the bond markets, which seems to be driven by global dynamics right now, become more sensitive to local pressures.

“One of the key concerns expressed by bond investors globally is the degree of consensus, and the narrowness of the breadth of those views,” writes Citi analyst Robert Crossley. “It has rightly made participants more than usually wary about positioning.”

UST 10-year short increased last month

While last month’s UST short covering was surprising after almost a year of watching the net short position develop, but the bulk of the change happened in a single week, and it wasn’t enough to seriously change the overall market position.

UST net shorts 0214 bonds

If anything, the short buying actually increased the imbalance between UST maturities: 60% of the UST net short that has been building is in 10 year bonds, compared to 15% in 15 years and less in every other maturity, but the short covering actually extended the long position on short 1-3 year maturities and extended the net short in ten year bonds.

Bond market: EGB and JGB curves also show consensus around 10 years

While the EGB curve is different than the UST curve, it also became more crowded in the center of the curve as investors focused their buying on 7 – 12 year bonds, continuing the lack of interest in shorter maturity bonds. The relative interest in core or periphery European bonds has changed, with demand for periphery bonds falling recently, but total demand has been quite steady. The JGB curve is more of a mixed bag, but there is still a strong consensus on 10 year bonds, which saw their net long position grow significantly during the last month.

JGB bond curve 0214

EGB curve 0214

It’s striking that there is so much consensus in the belly of all three bond curves, and that last month’s uncertainty in the US equity markets and emerging markets generally only seemed to drive more conviction in DM bond markets. Crossley doesn’t think this can last, and recommends investors position themselves or when the consensus starts to come apart.

“With risk aversion having fallen back we expect domestic drivers to reassert themselves again when global growth concerns simmer down,” he writes. “Relative positioning built up over the last year is favorable to the UST steepener and underlines our recommendation to express a +UST/-gilt view in 10yrs rather than in other maturities.”