KEY FINDINGS

• Hopes for a fiscal stimulus agreement and disappointing monetary policy announcements explain almost all the significant declines in the long-bias, within a backdrop of some better than expected data.

• The very recent Covid-19 vaccine-related news prompted shorts to build positions while longs remained stable

• Looking forward, fiscal policy expectations are likely to continue to play a critical role in driving positioning and shaping the yield curve

FISCAL POLICY EXPECTATIONS ARE DRIVING POSITIONING

Over 10% decline in 10Y longs and 12% increase in long-end shorts estimated by the model

The current positioning setup seems to reflect in significant part investors adjustments to fiscal policy expectations. An increasing positive outlook for an expanding fiscal policy was behind three out the four major declines in long positions identified by the model over the last two months.

Any new position in Treasuries needs to take into account the refinancing requirements for 2021, which are likely to bring a large amount of supply. The new US President approach to fiscal policy and the ability to reach a consensus within parties are likely to play a determining role in investors’ positioning and consequent shaping of the yield curve in the coming weeks.

The over 10% decline in longs in 10Y and over 12% increase in shorts in the long-end tell us that expectations are already in good part priced by the market.

Last week, the US T-Bond bounced back after reaching an overextended short (-20) on the Positioning Concentration Index (right chart, on Nov 12).

In previous issues of our Long-term Positioning Analysis, monetary policy was often the primary player shaping bond investors positioning. At the moment, fiscal policy expectations are key drivers of significant shifts in positioning.

Considering the high sensitivity of investors to fiscal considerations detected by the positioning model, we expect these factors to continue to be the determining force of positioning in the coming weeks

FOMC DISAPPOINTS, FISCAL POLICY EXPECTATIONS KICK IN

space10Y Treasury Note longs reduce positions by 11.2%

The 10Y Treasury Note long positions entered a declining phase soon after the FOMC September meeting (15-16 Sep). The reduction has been consistent over the last two months with some sharp moves (detailed below), totalling an 11.2% reduction in longs to the start of November with shorts increasing by 3% over the same period. In the longer-end, the US T-Bond move lower was driven by a sharp increase in short positions, +12.3%.

The timing of the shifts is provided by the positioning model. It reveals that the two key catalysts of the long-bias reduction are fiscal policy expectations and monetary policy announcements.

We also notice that whilst the long-end see a sharp net reduction in the long-bias, changes are more mixed in the short-end which is consistent with a steepening of the curve. The 2Y had a more contained reduction, whilst the 5Y saw a contraction in positions both in the longs and shorts (charts below)…

THE CONSTANT LONG-BIAS DECLINE IN US TREASURIES POSITIONS

KEY FINDINGS

• Hopes for a fiscal stimulus agreement and disappointing monetary policy announcements explain almost all the significant declines in the long-bias, within a backdrop of some better than expected data.

• The very recent Covid-19 vaccine-related news prompted shorts to build positions while longs remained stable

• Looking forward, fiscal policy expectations are likely to continue to play a critical role in driving positioning and shaping the yield curve

FISCAL POLICY EXPECTATIONS ARE DRIVING POSITIONING

Over 10% decline in 10Y longs and 12% increase in long-end shorts estimated by the model

The current positioning setup seems to reflect in significant part investors adjustments to fiscal policy expectations. An increasing positive outlook for an expanding fiscal policy was behind three out the four major declines in long positions identified by the model over the last two months.

Any new position in Treasuries needs to take into account the refinancing requirements for 2021, which are likely to bring a large amount of supply. The new US President approach to fiscal policy and the ability to reach a consensus within parties are likely to play a determining role in investors’ positioning and consequent shaping of the yield curve in the coming weeks.

The over 10% decline in longs in 10Y and over 12% increase in shorts in the long-end tell us that expectations are already in good part priced by the market.

Last week, the US T-Bond bounced back after reaching an overextended short (-20) on the Positioning Concentration Index (right chart, on Nov 12).

In previous issues of our Long-term Positioning Analysis, monetary policy was often the primary player shaping bond investors positioning. At the moment, fiscal policy expectations are key drivers of significant shifts in positioning.

Considering the high sensitivity of investors to fiscal considerations detected by the positioning model, we expect these factors to continue to be the determining force of positioning in the coming weeks

FOMC DISAPPOINTS, FISCAL POLICY EXPECTATIONS KICK IN

space10Y Treasury Note longs reduce positions by 11.2%

The 10Y Treasury Note long positions entered a declining phase soon after the FOMC September meeting (15-16 Sep). The reduction has been consistent over the last two months with some sharp moves (detailed below), totalling an 11.2% reduction in longs to the start of November with shorts increasing by 3% over the same period. In the longer-end, the US T-Bond move lower was driven by a sharp increase in short positions, +12.3%.

The timing of the shifts is provided by the positioning model. It reveals that the two key catalysts of the long-bias reduction are fiscal policy expectations and monetary policy announcements.

We also notice that whilst the long-end see a sharp net reduction in the long-bias, changes are more mixed in the short-end which is consistent with a steepening of the curve. The 2Y had a more contained reduction, whilst the 5Y saw a contraction in positions both in the longs and shorts (charts below)...

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