Positioning is still almost unanimously short in the U.S. but less so than previously, point out Citi analysts in their recent report.

Robert Crossley and David Bieber of Citi Research, in their research report dated March 20, 2014 also point out positioning is long in Germany, while it is longer in France.

Hedge funds: Plenty of room to increase shorts in US

The Citi analysts note the overwhelmingly short positioning in the U.S. would translate to reduced short-covering risk and lower sensitivity to very weak data. The following table highlights the short positioning in the U.S.

Positioning in US Hedge funds

By combining the above information together with the Citi USD Economic Surprise Index (ESI), the analysts deduce there is scope for a sell-off even before Yellen’s unscripted words spooked the market temporarily.

Resurgence in selling USTs

The Citi analysts point out that an analysis of flow data reveals resurgence in selling of USTs over the last month and that this trend persisted through the month. The following graph captures the monthly and weekly selling of USTs:

Selling of USTs Hedge funds

The analysts point out that a further analysis reveals that selling is concentrated in the 5-year part of the UST curve.

Moreover, by analyzing the accumulated positioning on the curve since last summer, the analysts note that the pain trade would be 2s5s or 2s10s flattening.  The following graph highlights the cumulative net selling of USTs.

Pain trade in USTs Hedge funds

Real money appetite for EGBs

The Citi analysts note there is strong demand from real money for European Government Bonds and surging demand for peripherals.

The following graph highlights how real money has been behind the buying of EGBs in the last month. However, the analysts point out that while real money has been increasing their exposure, hedge funds have been decreasing theirs and banks have been stepping back. The analysts believe such a dynamic could potentially be very significant if it continues and set the market up for a much more meaningful correction than if ownership were more balanced.

Real money behind EGB buying Hedge funds

The Citi analysts also point out that though positioning in BTPs and Bonos is long, it is not across the board implying there is still more room for buying from Asia and hedge funds. The following table captures the positioning in Italy and Spain:

Positioning in Italy and Spain Hedge funds

The analysts also note positioning is long in Germany, while it is longer in France. Moreover, positioning in Australia reflects the growing popularity of diversification and need for yield, while positioning in Japan remains relatively light.