The speculative net short position in the Ten Year Note futures market is the second largest, only bested by the market position in March of 2005.

Last time net shorts were this high, interest rates rose

RBS COT net short

According to the Commodity Futures Trading Commission’s Commitment of Trader’s report, the net short position 59.62 billion, recently surging $17.23 billion.  The net short position in March of 2005 was $60.5 billion.  When this happened, interest rates rose and bond prices fell leading into a high point in 2006.

RBS COT hedger

According to an investor note from the Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS), the main drivers were new shorts basically across the yield curve, from Eurodollars and Ultrabonds to the five year note and 30 year bond.  The net result was that the overall gross long fell by $2.4 billion, while the overall gross short soared by $14.8 billion. “The overall hedger net long position soared $23.35bn to $105.69bn in 10y futures equivalents,” the report noted. “The main drivers were new longs in Eurodollars to TY contracts. There was also short covering in US and FV and long liquidation outweighing short covering in WN. There were a significant rise in new shorts in TY.” 

The report noted the Levered Money’s net short rose $11.45 billion, the largest net short position since May of 2012.

Interesting week ahead

The RBS report noted that this week is interesting with PMI and jobs data due.  “The open interest changes between the CFTC COT snapshot and Friday’s close suggests to us that there were new shorts in Eurodollars and short covering in FV,” the report noted. “With the UST 2-5-10y butterfly at the highest level so far this cycle and at the highest level since early 2010, the speculator net short in FV futures running at -$8.81bn in 10y futures equivalents. This FV spec net short is the highest since early January 2008.”

The letter concluded further weakness could be ahead on the yield curve.  “The high level of the UST 2-5-10y fly and the high level of the spec net short in FV, (see chart on left) as well as the high level of overall speculator net short of $59.6bn suggest to us that for further weakness in the US interest rate market, we have to see key data like the upcoming ISM Manufacturing PMI, the Market PMI and the jobs data on Friday be significantly stronger than what the market expectations are currently,” the report said. “If this doesn’t happen, these is a decent risk of a short squeeze in our opinion.”