Bond sentiment cont…
I am still trying to piece together my estimate of the current sentiment in the bond market. There is no doubt that earlier in the year the consensus was quite bearish. And although there has been some movement during the latest squeeze higher, a lot of traders still seem squarely stuck in the bear camp. One example is the JP Morgan Treasury client survey. This survey measures client’s positioning against their respective benchmark.
JP Morgan Survey Net position (bottom histogram) vs US 10 Year Yield</a> </div>
The number of surveyed JP Morgan clients showing underweight still greatly outnumbers those overweight.
I am not sure whether I should worry too much about the lopsided sentiment of this survey. Although the JP Morgan clients were woefully wrong during the spring of 2012, they did in fact nail last year’s bond sell off. They correctly went massively short in front of the vicious bear market.
There is a lot of hyperbole being thrown around about the extended nature of this short position. Zerohedge seems to love focusing on the fact that the “all clients survey shows the most net shorts since May 1st, 2006.”
I am inclined to dismiss this survey as a useful tool for measuring sentiment. There is no way of knowing how short they are. The index measure the number of clients short or long, not their respective size of the position. Given the strange ZIRP environment, the benchmark indexes might have also shifted to an imprudently long duration. From a risk reward perspective of a fiduciary, there is an argument for being underweight duration at these levels. Also, these are not fast money type clients. My guess is that these clients are much longer term in their thinking and are not subject to the same sort of monthly mark to market pressure.
This might be me talking my book, so please take it with a big grain of salt. But I am going to dismiss this survey as not particularly useful. If I end up being wrong, we can chalk it up to one more case where “things are never different this time.”
I am much more concerned when I see traders talking about re-establishing shorts. I would like to see guys in my twitter stream advocating buying treasuries. So far, this has not been the case.
In fact, there are selective guys taking the same trade as I – shorting bonds into this move higher.
I don’t want to make too much of this sentiment issue. I often end up trying to be too cute – insisting on being alone in a trade while giving up the meat of the move that the crowd gets right.
At the very least, I get the sense that the massive unanimity about the certainty of rates rising after QE ends has been shattered.
We have successfully shaken out the weak shorts. I guess we can’t ask for more than that.
I am short bonds, and looking to add regardless of the dire warnings about the massive short positions.
I have so far refrained on commenting about tomorrow’s ECB meeting. I can’t remember who tweeted this, but on our desk we found it particularly funny:
First rule of Euro trading; don’t trade the Euro. Second rule of Euro trading; don’t trade the Euro.
The Euro currency seems to follow no rhyme or reason. If it always did what you didn’t expect, then that would be fine. But it has an element of randomness that I (and obviously others) find baffling.
I don’t have a strong opinion about tomorrow’s meeting. The ECB is obviously going to cut rates, but how much is already built in is the real question.
EUR trading over the past six months</a> </div>
I worry that this analysis is too easy, but I think that the ECB is going to once again disappoint by not doing enough.
Draghi & Co. have widely telegraphed this move. Given the fractious nature of their Central Bank makeup, I just don’t see how they are going to do anything really bold that outstrips market expectations.
Not only that, but in a balance sheet recession, I do not believe that the economy is sensitive to changes in the price of credit. Japan learned this the hard way during the 1990s and 2000s. Moving rates to absurdly low levels has very little effect on the economy. It is not like moving rates down 15 basis points all of a sudden makes a difference between a company or individual borrowing or not. I am much more interested in what the ECB might due to loosen up the availability of credit than the price.
The only thing that scares me about my “the ECB is going to disappoint” call is that it is firmly in the consensus camp.
Today’s post seems to be a real departure from my usual contrarian nature. I am trading with the herd with my short bond position, and I think I am going to also err on the side of betting the same way as consensus when it comes to tomorrow’s ECB meeting.
I am not taking any new positions, but I think tomorrow’s ECB decision disappoints and the crowd will be right. This will result in a perverse move of a higher Euro, precious metals following the rally and bonds selling off. I am hoping that this will be catalyst for the ending of the move out of real assets into financial assets. I know that seems counter intuitive as you would think that negative rates would be gold positive, but I firmly believe that Mario Draghi’s reputation as a financial guru has been one of the reasons for the violence of the recent move into financial assets. Tomorrow I think the market realizes the Emperor has no clothes.