Speculators’ net shorts fell

According to Royal Bank of Scotland traders Jim Lee and Nicholas Kirschner, the net short speculator position in 10 year futures equivalents fell $8.71 billion to $37.30 billion, the first fall since January 7, 2014. Longs in 10-year Treasury note futures (TY), 5-year Treasury note futures (FV), and Fed Funds and short covering of positions in Treasury bond futures longer than 15 years (US) and TY triggered the net short position decrease.

Short Positions

CFTC (Commodity Futures Trading Commission)

Short Positions

Hedgers’ net long position fell

Hedgers remain long 10 year equivalents futures and still show a $56.24 billion increase in long positions year over year. For the week ending on February 18, the long position has dropped $11.62 billion as shorts increased for the FV, TY, and US. Selling of some long positions in TY and Eurodollars also contributed to the lower long position. Two-year Treasury note futures (TU) moved to a more neutral position last week driven by a $1.61 billion increase.

Fall in asset managers’ net longs

Asset managers reduced their long positions by $12.73 billion for the week ending on February 18. Managers started TY and US short positions and reduced longs in Ultra Treasury Bond Futures (WN), which encompass futures of Treasury bonds maturing in more than 25 years.

Levered money transitioned to a net long in 10 y equivalents

Levered money’s net short position swung $19.85 billion to a net long of $3.07 billion in 10 year rate equivalents. New long positions and covering of shorts in TY and US drove the change to a net long position.

Dealers’ short position rose

Dealers increased their shorts by $4.51 billion to $97.32 billion by establishing new short positions in Treasury bond futures longer than 15 years (US), FV, and Eurodollars. Dealers also sold long positions in TY, triggering a negative change for the week ending on February 18, the first drop since September 3, 2013. WN positions rose $3.61 billion as dealers covered their shorts.

As market rates went up, higher open interest in Eurodollars, TU, and WN reflected establishment of new short positions. Meanwhile, open interest fell for FV, TY, and US which suggested long position liquidation.

5 year and 10 year Treasury note futures may outperform

Jim Lee and Nicholas Kirschner believe that both FV and TY will probably outperform in the Treasury futures series as the yield curve steepens. Market remains vulnerable to a short position squeeze if rates do not rise as traders expect. Speculators and dealers maintain high net short positions in 10 year futures equivalents of $37.30 billion and $97.32 billion, respectively. Declines in 10 year futures equivalents long positions held by hedgers and asset managers magnify the risk for a short position squeeze.