The bond sell-off may not be what it seems
Global yields are pushing higher again. Oil is back above $90. The Fed has sounded more hawkish. And concerns around fiscal sustainability have returned to the conversation.
Beneath the macro narrative, something more interesting is happening.
Systematic investors have never been this short G10 rates.
Vanda’s G10 CTA replication portfolio shows net shorts in G10 rates have reached a new record, surpassing the previous extreme in 2018. CTAs are now short across the G10 complex, with the largest positions concentrated in German rates.
That doesn't mean yields have peaked. But it does change the setup. At previous positioning extremes, major inflection points in yields have tended to follow. A catalyst is still needed to force a change in positioning, but the more stretched the short becomes, the smaller that catalyst may need to be.
The next few weeks offer several candidates.
First, oil
For all the focus on fiscal risk, oil remains a powerful driver of the recent move.
December Brent has risen roughly $15 over the past month. Vanda estimates that move has added at least 9bp to Treasury yields.
Meanwhile, some of the evidence you'd expect to see in a US-specific bond-market crisis is notably absent. US long-end pressure peaked in mid-August. The ACM 10-year term premium is broadly flat year-to-date. And internationally, the US sits closer to the middle of the pack than the fiscal narrative might suggest.
Australia, for example, has seen a near-identical rise in 10y10y forward rates despite a dramatically different government debt outlook.
Fiscal concerns alone, however, don’t explain the move in yields
Then, the Fed
Markets reacted aggressively to Kevin Warsh's Jackson Hole speech, but Vanda's reading was less hawkish than the price action suggested.
The September hike is not yet a done deal. With key policymakers still unconvinced of the need for higher rates, incoming inflation data could prove decisive.
Ordinarily, that would simply be another macro catalyst.
Against record CTA shorts, it potentially carries more weight.
The question is no longer just whether yields can move higher. It is how an increasingly one-sided positioning backdrop responds if one of the assumptions behind the sell-off starts to weaken.
That's the setup we're watching.
Vanda's latest FICC Tactical Strategy goes deeper into the catalysts that could trigger an inflection, alongside our current positioning signals, tactical rates and FX views and high-conviction trades.
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