I was catching up on some reading recently when I came across an article on Business Week's site "Treasury Bond Bears Submit to Fed as bond optimism at high" which I found interesting. If you read down about halfway through the article you will see the following paragraph:
Hedge-fund managers and other large speculators had a net- long position in 10-year note futures for the first time since Jan. 23, and reached a record long bet in two-year note futures for the week ending July 31, according to U.S. Commodity Futures Trading Commission data released Aug. 3.
The Commodity Futures Trading Commission data that they are referring to is the Commitment of Traders report or COT report for short. Now, I am far from being an expert on the COT report, however I do know that it gives a breakdown of the net positioning of small speculators (individuals like you and I), large speculators (hedge funds and large money managers) and commercials (institutions like banks who are using the market to hedge).
Here is a breakdown of that report going back through August of 2011. (The commercials are the purple line, the large speculators are the blue line and the small speculators are the yellow line):
Now here is a chart of the 10 year Treasury futures that the above report is based off of, over the same time period.
The first thing that I found interesting about this chart is that the large speculators, who you would think would be the smart money, have been net short through almost the entire period. During this time, the yield on the 10 year Treasury has gone from 2.77% to as low as 1.43%, which is a large move in the opposite direction of the way large speculators were betting.
Another thing that jumped out at me from the chart is that the two extremes on the COT report, seem to correspond at least roughly to the bottom of the two drops in the market that we saw in October of 2011 and March of 2012. As the drop intensified the commercials got more and more long the market and the speculators got more and more short. Conversely when the market began to rally again as interest rates headed lower, the commercials got less and less long the market and the large speculators got less and less short.
10 Year Treasury Futures Chart:
So what might we learn from all this?
- The fact that large speculators are now getting long the market is not a good sign for the bond market bulls. Since they have been wrong for the last year, the fact that they are now getting long the market should be seen as a negative in my mind at least.
- During the last two drops in the market speculators were at their largest short position and commercials were at their largest long positions at the market bottom. While correlation does not necessarily mean causation, it is interesting that based on these charts, the current pullback in the market could have a ways to go.
If the market continues to drop does this mean that the bull market in bonds is over? Not necessarily. For more on this see our article what the TLT chart is telling bond traders.
See something on these charts that I am not seeing? Let us know in the comments section below.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.