At 7 a.m. in New York, a Red-Hot Treasury Trade Starts to Unwind

Like clockwork this week, as soon as the New York trading session has gotten underway, 30-year Treasuries have jumped.

Despite barely budging during the Asia and London trading sessions — home to some of the bigger buyers of longer-dated Treasuries — 30-year yields have dropped an average of five basis points each day this week between 7 a.m. and noon New York time.

One trader in New York, who asked not to be named as he isn’t authorized to speak publicly, said the buying has been dominated by accounts taking off short positions, as crowded steepener trades are being pared down.

In recent months, positioning for a steeper yield curve has been a hot strategy in bond markets, on the expectation the Federal Reserve would take a more relaxed approach on inflation — something which came to fruition at Jackson Hole on August 27. Yet even as Wall Street strategists reiterated their “steepener” recommendations, 30-year yields have fallen more than 10 basis points to 1.39% Thursday, having risen from 1.22% at the start of April.

Bond Traders See ‘Green Light’ to Keep Driving the Curve Steeper

Crowded Trades

The crowded trades show up in the latest data. Net short positions in U.S. long-bond futures from speculative accounts were near the largest since 2006, according to weekly Commodity Futures Trading Commission data for the week ended August 25.

The timing of the recent moves has stood out to Citigroup Inc.’s Edward Acton, with the strategist commenting on the recent trend of “real money” purchases in a note to clients Wednesday.

“Treasuries saw a familiar pattern of intraday trading, as a weaker overnight opening faded into the New York open, with the long-end reversing losses and then some on cash buys and aggressive futures block buying,” he wrote.

This isn’t the first time in recent memory where activity in one region has stood out. Up until Aug. 20, 30-year yields fell during six consecutive Tokyo trading sessions, racking up a nine basis point cumulative decline. However, yields actually rose in total over that period.

Source: Read Full Article