The “Big Bond Short” Illusion

Before we even start, I want to point out I deserve zero credit for this next idea. All of the following insightful observations are brought to you by Adam Collins of Movement Capital. Adam’s work on COT data is second-to-none and he is a must-follow.

Over the past few months I have struggled with a glaring inconsistency.

The CFTC’s Committment of Trader’s (COT) data for the 10-year US treasury note has displayed a large increase in the size of the net speculative short position, yet this is at odds with what I observed in terms of market sentiment amongst traders and portfolio managers.

This increase in speculative net shorts has pushed it to a record position.

The bond bulls point to this new record short position and ominously label it the “Big Bond Short” that will be bought back in the coming quarters when the US economy implodes due to the inevitable deflationary bust. Some derivation of this chart with the smart-alec caption “this will end well LOL” fills my twitter feed every day.

And herein lies my problem. The CFTC data does not square with my anecdotal evidence of market positioning in the US bond market.

I don’t see a preponderance of bond bears pushing their luck with massive short positions. In fact, it appears that the speculative community is erring more on the long side. Poll your global macro hedge fund manager or your local independent trader, and dollars-to-donuts, they will most likely be long US fixed income – not short. The most common held belief is that the Federal Reserve has tightened into the next recession with the economy about to roll over. Some of the more high profile leaders of this school of thought are Raoul Pal or David Rosenberg. And this camp has consistently used the COT data as a reason for their bullishness.

Yet, they are not lone wolves bravely fighting off the mindless shorts, but I contend instead represent “fast money” consensus.