Treasury Bears Beware: Explosive Short-Covering Rally Coming Up

Zerohedge has an interesting post out today called Treasury Specs Are So Short, It Is Now A 4 Sigma Event. Let’s take a look at his charts and a couple of mine.

According to the latest breakdown of short positions by Deutsche Bank, speculators increased their net shorts by $7.7 billion in 10Y cash equivalents to $99.4 billion, a third successive week of record low positions.

Aggregate Treasury Spec Shorts

5-year Treasury Spec Shorts

10-year Treasury Spec Shorts

30-year Treasury Spec Shorts

Standard Deviations Treasury Spec Shorts

Eurodollars Spec Shorts

The above charts and comments from ZeroHedge via Deutsche Bank.

Explanations

1. For every future short there is a future long, so the net is always zero. In this case, the commercial traders are long and the speculators are short.
2. Eurodollars have nothing to do with euros. They are actually an interest rate play on US dollars. Short eurodollars is a bet that interest rates in US dollars will rise.

Yield Curve Monthly Chart

Yield Curve Weekly Chart

Short Covering Setup

1. Belief in the Trump economy is extremely high.
2. Treasury Shorts keep piling on even as yields decline.
3. Those short from 3-4 weeks ago are already underwater.
4. A very explosive short-covering setup is in play. All it takes is one very bad economic report and yields will plunge.

Related post: Trump Euphoria Sets In; Small Businesses Optimism Surges Most Since 1980: What’s It Mean?

Mike “Mish” Shedlock