Yesterday, when discussing Crispin Odey’s letter to clients and what appears to be his “Hail Mary” trade, we pointed out that according to his latest client letter, the billionaire hedge fund manager has effectively bet everything on a plunge in bond prices, with a whopping 135% net short in gilts and JGBs.
We noted that, in light of recent shifts mostly among the CTA and hedge fund crowd, he is hardly alone in his mega bearish outlook on bonds.
Sure enough, according to the latest JPMorgan survey (for the week through Oct. 2) the bank’s clients as a whole have dramatically soured on Treasuries, with 44% holding a short position relative to their benchmark, the most since 2006, or before the financial crisis, and up from 30 percent in the prior period. Among those who actively place bets, such as speculative accounts, a record 70% were short, while an unprecedented (and impossible) 0% responded that they were long: in other words, everyone is on the same side of the boat.
As Bloomberg commented on the dramatic move, “the shift shows how a confluence of factors is weighing on the minds of bond traders as the fourth quarter begins. The Federal Reserve will start unwinding its balance sheet this month, and Chair Janet Yellen has signaled that stubbornly low inflation won’t deter policy makers from tightening. Meanwhile, in the betting markets, former Fed Governor Kevin Warsh, seen by some traders as having a more hawkish tilt, has the highest odds to succeed Yellen.”
In the eyes of William O’Donnell at Citigroup Inc., the selling pressure may have only just begun.
“The crowd of longs between seven years and 30 years in U.S. rates is both heavy and also now slightly underwater,” with yields near or above their 2017 averages, O’Donnell, a strategist, wrote in a report Tuesday. “It leaves us thinking that any additional positioning stress via higher rates may one day turn a trickle of selling into a torrent of secondary market supply under the right conditions.”
