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Large Short Positions in Treasuries Threaten to Spark Market Turmoil, Analysts Warn

  • U.S. asset managers have built up large short positions in Treasury futures, similar to positions that caused turmoil in March 2020. This poses risks if an event forces sudden selling.

  • The Bank for International Settlements warns the $600B in net short Treasury futures positions could spark "margin spirals" and market disruption.

  • In March 2020, pandemic sparked forced selling of Treasurys, spiking yields. A potential government shutdown could do the same.

  • If traders must suddenly sell Treasurys to cover margin calls, demand could evaporate, causing yields to spike.

  • Heavy net short positions could spark dislocation and sharp yield rises, especially if unexpected events force higher margin requirements.

investopedia.com
Relevant topic timeline:
The wait for an elusive recession is getting costly for big-name money managers bullish on bonds. They’re doubling down 
📉 Money managers who loaded up on US government bonds as a bet against recession are now facing subpar returns and a deepening selloff as Treasury yields rise. 📉 The annual return on US government bonds turned negative last week as Treasury yields reach a 15-year high, suggesting that interest rates will remain elevated and the economy can handle it. 📉 Bob Michele, CIO for fixed income at J.P. Morgan Asset Management, remains undeterred and is buying every dip in bond prices. 📉 Other prominent money managers, including Allianz Global Investors, Abrdn Investments, Columbia Threadneedle Investments, and DoubleLine Capital, believe that the impact of Federal Reserve rate hikes is just starting to be felt by the economy and predict a recession. 📉 Fund managers are making adjustments to duration to hedge their positions, with some shortening duration while others maintain overweight positions. 📉 Historical patterns suggest that rate hikes often lead to slumping economies, but it remains uncertain whether yields will follow the same pattern this time. 📉 The borrowing needs of wealthy economies and the flood of debt issuance may lead to higher yields. 📉 Despite the current environment, some funds that took short bond, long stock positions have faced significant drawdowns, indicating that rates may remain elevated. 📉 J.P. Morgan's Michele is confident that bond yields will fall once the Fed finishes its tightening cycle, even before the first rate cut.
The wait for an elusive recession is getting costly for big-name money managers bullish on bonds. They’re doubling down 
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Hedge funds are increasing their short positions in the Treasury market, while asset managers are going long, reflecting different views on the U.S. economic outlook and causing volatility in the 10-year Treasury yield.
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