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NOMURA: Investors Are Hedging Too Much Against A December Taper

NOMURA: Investors Are Hedging Too Much Against A December Taper

10 year yield

Business Insider/Matthew Boesler (data from Bloomberg)

The yield on the 10-year U.S. Treasury note trades near 2.8%, and volatility in the market is creeping up again.

The consensus on Wall Street still appears to be that the Federal Open Market Committee will refrain from announcing the first tapering of the Federal Reserve's quantitative easing program until its March policy meeting.

However, good news on the economic data front has market participants wondering if the FOMC could announce tapering at its January meeting, and possibly even its December meeting.

George Goncalves, head of fixed income strategy at Nomura Securities, believes the market may be getting over-hedged for such a possibility, just like in September, when the FOMC surprised market participants by refraining from tapering at a time when it was largely expected.

Treasury put/call ratio

CFTC, Nomura, Bloomberg

"It feels like the market could be getting over-hedged again as it did in September, evident in the spike in [10-year U.S. Treasury futures] put-call ratio last week," writes Goncalves in a note to clients this morning.

"We believe a December taper is unlikely, and will only occur if things line up perfectly, with Yellen chairing the December FOMC, consistently strong data, and real progress on the fiscal front."

Goncalves notes, however, that increased hedging accompanied bullish inflows into bonds as an asset class at the end of November.

"Flows continue to be bullish biased in the latest release of positioning data," he says. "Bond funds continue to see outflows, although at a slower pace while there were bullish flows from all other investor types we track. Specs increased their net risk by $3.5bn (in 10yr eqv.) while dealers were net buyers of USTs by $8.2bn. Both domestic and foreign banks were net buyers by $8.4bn and $1.1bn, respectively, and foreign central banks? holdings of USTs are the highest on record."

CFTC Treasury data

CFTC, TD Securities

According to the latest CFTC data released yesterday, reflecting the week through November 26, investors nearly halved their short position in Treasuries, taking it down to $11.2 billion from $19.4 billion in the previous week.

Gennadiy Goldberg, an interest rate strategist at TD Securities, says the data reflect market positioning in the wake of the curve steepening that took place following the release of the minutes from the October FOMC meeting on November 20.

"Implied curve positioning continues to point toward flattening even as the spot curve reached its widest point since before Operation Twist following the release of the October FOMC Minutes, which showed the Fed's preference toward increased forward guidance in lieu of QE," says Goldberg.


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