LONDON (Reuters) - Speculators are sticking to their bearish bets on the dollar and U.S. Treasuries. But the dollar and yields have barely moved in the last two months, and with stock markets looking so fragile, the risk of a sudden position squeeze and reversal is growing.
That could potentially see the dollar spike higher, dragging the euro back towards $1.20 and pushing the 10-year yield’s first break above 3 percent in more than four years even further into the distance.
Chicago futures market positioning data show that hedge funds and speculators have increased their bets against U.S. bonds across the curve. The short end has seen the biggest swing against two-year notes since September, while short positions at the longer end have only been bigger a handful of times since the 1990s.
Specs are also the most bearish on the dollar in more than 6-1/2 years, a position cemented by one of the biggest swings in favour of the Japanese yen on record. This move, in particular, is noteworthy.
The reduction in short yen positions, or bets against the Japanese currency, shows how quickly investor patience can run out when a position isn’t in the money, and how quickly sentiment can turn.
Investors typically buy the yen in times of market uncertainty, volatility and falling asset prices, while they sell it in “risk on” markets when asset prices are rising.
The latest Commodity Futures Trading Commission data show that speculative accounts slashed their short yen position by 57,540 contracts in the week to March 20. That was the third-largest position swing in favour of the Japanese currency since CFTC began compiling the data in 1995.
(For a graphic showing CFTC speculators' yen position, click here: reut.rs/2GcYZib)
That coincided with the dollar breaking below 105 yen for the first time since November 2016, and a selloff in global stocks as fears of a U.S.-led global trade war surged and the deepening controversy around Facebook hit the tech sector.
Wall Street slumped 6 percent that week, the worst performance for U.S. stocks in over two years. Some $2 trillion was wiped off the value of world shares.
Hedge funds and speculators have been short the dollar since June last year, and that position has broadly been growing since January. It’s now effectively a $22 billion wager the dollar will weaken against the world’s major currencies, according to Reuters calculations and CFTC data.
Yet the dollar’s decline is losing steam, and since late January it has barely moved at all. How long will hedge funds and speculators hold onto a position that’s costing them so much money week after week?
It’s a similar, if slightly less extreme, situation on the bond side.
The latest CFTC data show that speculative accounts chalked up the biggest increase in short two-year Treasury futures since late September, to 184,036 net short contracts from 119,263 the week before.
They increased their net short 10-year Treasury futures position to 313,304 contracts. Specs have only been more bearish on 10-year U.S. bonds in 10 weeks since comparable figures were first compiled in the mid-1990s.
The net short five-year bond position of 464,725 contracts, meanwhile, is the fourth-largest net short on record. The previous three have all been in recent months, with the record short 489,630 contracts from earlier in March now in sight.
(For a graphic showing CFTC - 10y U.S. Treasuries, click here: reut.rs/2GoSlZr)
(For a graphic showing CFTC - 5y U.S. Treasuries, click here: reut.rs/2GvFlkV)
Again though, with the exception of short-dated yields that track rising U.S. interest rates, bond yields haven’t moved much recently. The 10-year yield topped out at 2.95 percent over a month ago, and the yield curve has flattened since mid-February.
With world stocks now in the red year to date, worries mounting over global trade and some signs that global growth might have peaked, the potential for U.S. bond yields to rise much further - if at all - is open to question.
The 10-year yield appears to have hit a ceiling at 3 percent. The longer it fails to break through it, the more likely a slide lower becomes if shorts throw in the towel.
The opinions expressed here are those of the author, a columnist for Reuters.
Reporting by Jamie McGeever; Editing by Hugh Lawson