KEY FINDINGS

• THE INCREASE IN 10Y SHORTS HAS BEEN ABRUPT AND CONCENTRATED IN TWO SHORT PERIODS

• THE ABSENCE OF POSITIONING IMBALANCES IS PROVIDING SCOPE FOR A GREATER MOVE

• EQUITY FUTURES LONGS ADDED WHEN 1) GROWTH DATA AND 2) FISCAL PACKAGE EXPECTATIONS PROMPTED SHORTS TO BUILD-UP IN RATES

• GROWTH AND FISCAL POLICY KEY TO SUSTAIN A CONTINUATION OF THE REFLATION TRADE WITHOUT A MAJOR UNWINDING OF LONG POSITIONS IN RISK ASSETS

• CURRENTLY, LONGS ARE UNWINDING POSITIONS IN THE S&P500 WITH A SIGNIFICANT MOMENTUM

REFLATION TRADE LARGEST POSITIONING SHIFT EXECUTED IN EARLY JANUARY

10Y shorts increased by 27.3%, while the 2Y longs rose by 30.5% on an already large longs base

In the second half of 2020, the US Treasuries saw a steady decline in their structural long-bias. The sell-off was driven by longs cutting positions (see “The Constant Long-Bias Decline in US Treasuries Positions”). In this year’s bear-steepening move, an accumulation of shorts is leading the sell-off in the long-end. At the same time, longs are building up positions in the 2Y.

The reflation trade positioning shift started at the beginning of January. The model flagged the move on Jan 11 (“Short positions in the driving seat”). The change in positions was significant taking positioning momentum negative on all futures except the 2Y.

We identified two key events that caused a major shift in US Treasury futures positions:

– the prospect of more generous fiscal stimulus measures with the issuance of more government bonds, triggered on Jan 15;

– the release of the Q4 economic data with the GDP growth rate at 4% and better than expected jobs data on Jan 28.

In the first instance, at the start of January, 10Y shorts increased by 9.6%. A week later, after the release of better than expected growth data, another 10% was added.

In the same 2-week period, the 2Y longs have been consistently increasing their exposure. The Positioning Concentration Index, which tracks any positioning imbalance, reached a +20 (overextended long) on Jan 27 (blue bars, 2Y chart below) ahead of a brief move lower.

THE ABSENCE OF POSITIONING IMBALANCES IS PROVIDING
SCOPE FOR A GREATER MOVE

spWe estimate that 2/3 of the shift in positions has been carried out in January.

S&P500 longs are now lower than in January…

THE REFLATION TRADE QUANTIFIED

KEY FINDINGS

• THE INCREASE IN 10Y SHORTS HAS BEEN ABRUPT AND CONCENTRATED IN TWO SHORT PERIODS

• THE ABSENCE OF POSITIONING IMBALANCES IS PROVIDING SCOPE FOR A GREATER MOVE

• EQUITY FUTURES LONGS ADDED WHEN 1) GROWTH DATA AND 2) FISCAL PACKAGE EXPECTATIONS PROMPTED SHORTS TO BUILD-UP IN RATES

• GROWTH AND FISCAL POLICY KEY TO SUSTAIN A CONTINUATION OF THE REFLATION TRADE WITHOUT A MAJOR UNWINDING OF LONG POSITIONS IN RISK ASSETS

• CURRENTLY, LONGS ARE UNWINDING POSITIONS IN THE S&P500 WITH A SIGNIFICANT MOMENTUM

REFLATION TRADE LARGEST POSITIONING SHIFT EXECUTED IN EARLY JANUARY

10Y shorts increased by 27.3%, while the 2Y longs rose by 30.5% on an already large longs base

In the second half of 2020, the US Treasuries saw a steady decline in their structural long-bias. The sell-off was driven by longs cutting positions (see “The Constant Long-Bias Decline in US Treasuries Positions”). In this year’s bear-steepening move, an accumulation of shorts is leading the sell-off in the long-end. At the same time, longs are building up positions in the 2Y.

The reflation trade positioning shift started at the beginning of January. The model flagged the move on Jan 11 (“Short positions in the driving seat”). The change in positions was significant taking positioning momentum negative on all futures except the 2Y.

We identified two key events that caused a major shift in US Treasury futures positions:

- the prospect of more generous fiscal stimulus measures with the issuance of more government bonds, triggered on Jan 15;

- the release of the Q4 economic data with the GDP growth rate at 4% and better than expected jobs data on Jan 28.

In the first instance, at the start of January, 10Y shorts increased by 9.6%. A week later, after the release of better than expected growth data, another 10% was added.

In the same 2-week period, the 2Y longs have been consistently increasing their exposure. The Positioning Concentration Index, which tracks any positioning imbalance, reached a +20 (overextended long) on Jan 27 (blue bars, 2Y chart below) ahead of a brief move lower.

THE ABSENCE OF POSITIONING IMBALANCES IS PROVIDING
SCOPE FOR A GREATER MOVE

spWe estimate that 2/3 of the shift in positions has been carried out in January.

S&P500 longs are now lower than in January...

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