96 Billion Reasons Why The Treasury VaR Shock Is About To Get Worse
The last 24 hours have seen some truly remarkable fireworks in the world of bonds, and especially in the short-term rates space, where as we reported yesterday first Canadian, then Australian 2Y yields exploded higher, as the two central banks turned surprisingly hawkish, prompting a violent selloff.
Commenting on these violent moves, Nomura’s Charlie McElligott was laconic, noting that the smell of “VaR-napalm” was eminating from Macro hedge fund pods with the fresh Rates calamity overnight, as traders freak out over the “hawkish global CB pivot fire” which “continues to be a disaster with trapped bad positioning from clients, and Dealers largely unable to provide liquidity in light of event-risk (i.e. ECB) and VaR constraints, further exacerbating the stop-outs in both USD and EUR short upper left and steepeners seen seen recently.”
Yet as opposed to the front-end sell-off still extending on the “CB hawkish panic” as central banks scramble to catch up to inflation hinting at rate hikes, ending QEs and unleashing other shocks, McElligott also points to the even more ominous move in the long-end – which is behind the massive curve flattening in the past 24 hours – as Global Bond futures 10Y-and-out are holding the painful multi-day short-squeeze rally, as we discussed earlier this week
Naturally, in light of the recent pre-recessionary flattening carnage, what traders want to know is whether the pain is over.
For the answer we go to McElligott again, who notes that the CTA short-cover he discussed yesterday has extended further into the global bond complex with a staggering “buy to cover” of ~$56B on the day yesterday alone, and the aggregate “cover” now +$80.9B vs 1 week ago (broken down as buying-to-cover of +$23.9B EUR 10Y, +$7.4b GBP 10Y, +$31.8B USD 10Y and +$13.0B JGB 10Y since last week), largely on account of the flip in the 2 week time-series
But what is even more remarkable is that “the net short dollar exposure across aggregate G10 Bonds positioning in the CTA Trend model is still a substantial -$96.1 Billion”, which according to McElligott remains historically “extreme short” at just 4.8%ile on 10Y lookback (up from 0.4%ile 2d ago) so, as the Nomura quant warns, “there is more squeeze potential, potentially, say, due to an ECB “dovish surprise” pushback with forward guidance today.”
No matter how today pans out, however, CTA positioning remains an enormous “chop” risk overhang in rates because as shown below many are now again closer to “sell / short” levels here than further “buy / cover.”
Thu, 10/28/2021 – 12:55